Investors are confronting a "hidden risk" when diversifying their portfolios because both bonds and certain stocks are highly valued, Dubravko Lakos-Bujas, JPMorgan's head of U.S. equity strategy, said Tuesday.
"Bond valuations are obviously very, very high for various reasons. We have seen contagion into the equity space," he told CNBC's "Power Lunch."
That's because investors in search of yield have moved into stocks that pay dividends, causing the market to be "dislocated," he added.
At this point, Lakos-Bujas believes diversification makes a lot of sense. However, historically that means investing in both bonds and equities.
"Today I think one of the hidden risks that we face is that if yields start to creep higher, especially if they start to creep higher for nongrowth reasons, be it central bank related, you could see bonds potentially getting deflated and you could see equities being pressurized, which means cash."
JPMorgan has said it expects the to end the year at 2,000, with market leaders poised for the biggest fall.
It also projects some sector laggards to do relatively better, such as health care.
"We basically see superior growth in health care, on one hand. On the other hand, we see relatively attractive valuations," Lakos-Bujas said.
— CNBC's Tom DiChristopher contributed to this report.