Stocks are trading at a fair valuation, and it's not time to be bearish as the market has deflated and the Fed is on track for a soft landing, former PIMCO chief economist says

• Stocks are fairly valued, and it's no time to be a "big bear" about the stock market, according to Paul McCulley.
• The former PIMCO chief economist pointed to overvalued areas of the market cooling off, as well as cooling economic data.

It is is not the time to be a "big bear" as stocks have hit a fair valuation the Federal Reserve is on track for a soft landing, according to former PIMCO chief economist Paul McCulley.

"I don't want us to pound the table and get wrapped around the axle about earnings. The stock market is in fair valuation," McCulley said in an interview with CNBC on Monday. "It is not time to be a big bear on stocks. That was a year ago," he added.

His view is contrary to other top commentators, with a number of Wall Street banks predicting a 20% drop or mor in the stock market next year as rate hikes drag corporate earnings lower and the US economy tips into a recession.

But there are signs that the economy is cooling enough for the Fed to pull back on its aggressive rate hikes, and a soft landing—a mild downturn where the labor market remains buoyant—is plausible, McCulley said. The S&P 500 has fallen 15% since January, and particularly inflated areas of the market, like tech and growth stocks, have been knocked lower by downbeat earnings this year, further signaling that parts of the market may be trading at reasonable valuations now.

Markets are pricing in a 50-basis-point hike at the Fed's December meeting, which would take the fed funds rate to 4.25%-4.5%. It's possible the Fed could raise rates up to 5% and leave them there for an extended period of time to get a grip on inflation, one Bridgewater strategist warned. But even as rates edge higher, McCulley believed the central bank can avoid a recession.

"They're trying to find the right street in the restrictive neighborhood going forward," he said of the Fed's policy rate. "I would associate myself with the soft landing camp as a feasible and likely outcome, not a remote outcome."