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JPMorgan sees the S&P 500 sliding 6% — here's how it happens

JPMorgan: Rotate out of momentum into value

Increased market volatility and rising long-term bond yields are raising risks for the S&P 500's leading sectors and the broader market, Dubravko Lakos-Bujas, JPMorgan head of U.S. equity strategy, said Wednesday.

JPMorgan expects the S&P 500 to end the year at 2,000, representing a roughly 6 percent decline from its current level, making it the most bearish of its peers on the Street. In this scenario, the market leaders are poised for the biggest fall, while some sector laggards will do relatively better, Lakos-Bujas said.

Lakos-Bujas sees rising equity market volatility as central to the pullback. Following a two-month period of very low volatility, investors have been lulled into a sense of complacency, and any pickup in volatility could spark a "deleveraging event," in which investors dump stocks, he said.

That selling will not necessarily happen immediately, he said, but an initial wave of selling could snowball by breeding negative sentiment and aversion to risk. Already, investors are feeling cautious as stocks sit at lofty valuations, he said.

"Positioning is pretty stretched. Technicals are exhausted. So if anything, I would probably be waiting for some further correction, and then take advantage of that to turn slightly more constructive," he told CNBC's "Fast Money: Halftime Report."

The recent rise in long-term sovereign debt yields is also cause for concern because it stands to draw investors out of dividend-yielding stocks like telecoms and utilities, which have served as substitutes for bonds during a period of persistently low interest rates.

Dividend-yielders have been the biggest beneficiaries of outflows from bonds with low or negative yields, Lakos-Bujas said. Since those defensive stocks have driven S&P 500 gains, interest rates need to stay lower in order for the market to maintain current levels.

"If yields continue to spike up, that could pressurize the market," he said, adding that the Bank of Japan's monetary policy decision later this month will be critical.

JPMorgan believes investors will ultimately rotate out of those defensives and into sectors that have not performed as well. The bank's sector picks are health care, energy, materials and financials. Investors got a preview of this when utilities and telecoms led a market sell-off last Friday, Lakos-Bujas said.