As a Fed rate hike looms, the S&P 500 could fall 10%! MRA strategist: There may even be a second wave in December.

Macro Risk Advisors LLC said the Federal Reserve's rate hike, which could begin as early as this week, may trigger a pullback in the S&P 500, as declining corporate profit margins weigh on the earnings outlook while the market braces for a tightening cycle. The S&P 500 has fallen nearly 1% since the start of September, historically the weakest month of the year. Lingering market concerns over high energy costs and recent inflation data have pushed the U.S. 10-year Treasury yield above 5% for the first time since 2023. That expectation has led traders to almost fully price in a 25-basis-point rate hike by Fed Chair Kevin Warsh on Wednesday, up from about 60% a week ago. Macro Risk Advisors founder and CEO Dean Curnutt said that if the hike lands on Wednesday, the market will come under greater pressure. "We expect an 8% to 10% pullback in the S&P 500, with a possible second leg down in December," he wrote in a note to clients on Monday. He said the rate hike will "squeeze the profit margins of companies that cannot pass on costs," while delivering a volatility shock to a market that is not prepared for it. Curnutt said the current market setup resembles what investors saw in 2018. At that time, the S&P 500 peaked in September and then plunged a cumulative 10% in October and November. Curnutt warned that "the Santa Claus rally did not materialize" that year, and the market suffered another leg down in December, ultimately falling nearly 20% from its peak. Given that history, Curnutt believes "taking a defensive posture right now is the right thing to do." Similar to 2018, he expects the market to move lower again in December in response to multiple Fed rate hikes in a "K-shaped, low-liquidity economy."