Investors hoping for a rate cut from the Fed need to wake up to the fact that such a move would be bearish for stocks, JPMorgan's Marko Kolanovic says

• JPMorgan's Marko Kolanovic said in a Monday note that the worst has yet to come for the stock market.
• Kolanovic said investors are not acknowledging the fact that interest rate cuts from the Fed would be bearish.
• Interest rate cuts "will either be because of the onset of a recession or a significant crisis in financial markets," Kolanovic said.

The worst has yet to come for the stock market as investors fail to grasp the risks related to Federal Reserve potentially cutting interest rates, according to JPMorgan's chief global markets strategist Marko Kolanovic.

"What equity markets refuse to acknowledge is that if rate cuts happen this year, it will either be because of the onset of a recession or a significant crisis in financial markets," Kolanovic said in a Monday note.

While the Fed has not signaled the potential for future interest rate cuts, the bond market is currently pricing in several cuts by the end of the year. According to the CME's FedWatch Tool, markets expect upwards of three 25-basis point cuts by the end of the year.

"Dissonance remains between the bond market that expects rate cuts this year, equity market interpretation of those potential cuts as positive for risk, and the Fed's rhetoric not seeing any rate cuts," Kolanovic said.

That disconnect could ultimately come at the expense of stock market investors, according to Kolanovic, who highlighted a host of other reasons why the stock market is set up for failure right now.

Equity market breadth, or the rate of participation in upside moves among individual stocks, is "by some measures the weakest ever, with the narrowest stock leadership in an up market since the 1990s," Kolanovic said. That means a lot of investors are relying on just a handful of stocks to generate gains.

Additionally, Kolanovic said the artificial intelligence hype that has helped push up the stock prices of various tech stocks "appears to be stretched" as investors start to rotate back into defensive stocks.

"We are more positive on tech this year than last, but think the sector is getting stretched in absolute terms... Leadership is turning defensive and we think this rotation continues into/around the last [interest rate] hike," Kolanovic said.

Finally, Kolanovic reminded investors that tightening monetary policy from the Fed acts with a lag, evidenced by the collapse of a handful of regional banks over the past couple of months, and that could lead to a severe sell-off for stocks as the effects of Fed tightening continue to ripple through the market.

"The consensus view that the worst of pressures is behind us will likely be proven wrong, as the impact of monetary tightening worked historically with a lag, and certain growth supports are waning, such as excess savings and strong margins," Kolanovic said.

That, combined with the fact that there is an alternative to stocks for investors in the form of 5%-yielding treasury bills, gives Kolanovic confidence that "stocks are set to weaken for the remainder of the year."

If Kolanovic's bearish view does materialize and stocks head back to test its mid-October low, the S&P 500 would decline by 16% from current levels.