JPMorgan strategist Mike Bell said the biggest market risk is if there is no recession this year and wage growth stays high.
That would force the Federal Reserve to raise rates by more than expected to rein in inflation, he told Bloomberg.
Both stocks and bonds would decline if the central bank isn't able to deliver rate cuts that the market is expecting, he added.
The biggest threat to markets right now is if a recession doesn't materialize, forcing the Federal Reserve to remain hawkish, JPMorgan strategist Mike Bell said.
The Fed has aggressively raised rates to combat rampant inflation since March of last year. A slew of economic data points indicate prices are cooling, but markets are bracing for a recession as the tight monetary policy slows the economy.
The S&P 500 and the Nasdaq Composite are up nearly 6% and 11% in the past month, respectively, as Wall Street sees the Fed reversing its tightening campaign in response to an economic downturn.
But if the US economy avoids a recession and wage growth remains high, then the Fed would not cut rates as expected and instead would have to resume rate hikes in the second half of the year, lifting them higher than Wall Street currently anticipates, Bell told Bloomberg TV.
"Unfortunately, [at that point] you're back into a world where both bonds and stocks would go down together," he said.
But JPMorgan's base case assumes there will be a recession in 2023 that will allow wage pressures to moderate and the Fed to cut rates in 2024, Bell said.
"My best guess is that the Fed is going to bring rates down to about 2.5% by the end of 2024," he added.
The Fed is expected to deliver its smallest rate hike in nearly a year when its two-day policy meeting ends Wednesday.
A 25-basis-point rate hike this week plus another of the same size later this year that's also widely expected would bring the fed funds rate to 4.75%-5.00%.
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