The S&P 500 faces a near-term selloff and likely won't rally until the Fed starts cutting rates, JPMorgan's top strategist says

• The S&P 500 faces pain ahead and likely won't rally until the Fed starts cutting rates, according to JPMorgan's top strategist.
• "We really think the Fed will need to cut the rates for the market to rally on a sustainable basis," Marko Kolanovic said.
• The benchmark index notched its worst day so far this year on Tuesday as investors worry the Fed will keep rates high.

The S&P 500 faces a near-term selloff and likely won't rally until the Federal Reserve starts cutting interest rates, according to JPMorgan's top strategist.

Marko Kolanovic said Tuesday he expects US stocks to fall another 5%, while the more volatile tech shares could drop up to 10%, in a CNBC interview.

"We really think the Fed will need to cut the rates for the market to rally on a sustainable basis," the bank's chief strategist said.

US stocks took a beating on Tuesday after rallying since the start of 2023, as investors grow concerned that stubbornly high inflation will convince the Fed to keep lifting interest rates. The S&P 500 notched its worst day of the year so far, dropping 2% to close below 4,000.

Inflation has been slowing from the 40-year high of 9.1% annualized rate reached last year, but is still way above the Fed's 2% target, coming in at 6.4% in January. It's sparked questions whether the Fed could raise its key policy rate by as much as 50 basis points at the central bank's upcoming meeting.

Minutes from the central bank's meeting earlier this month are due Wednesday, which could give investors further hints on the outlook for US monetary policy.

According to Kolanovic, equity markets haven't entirely priced in the possibility of further rate hikes like the bond market has done. The yield on the 2-year Treasury note soared past 4.7% on Tuesday, approaching its highest level since 2007. That shows investors are selling off bonds in anticipation of the fed funds rate moving higher.

Kolanovic gave a price target of 4,200 price target for the S&P 500 this year. "We do think we get a sell-off now, perhaps we retest lows that we saw last year, and at that point maybe the Fed gets a message and starts cutting rates," he said.