Stocks could drop significantly if the United States and China dig in during trade talks, Wharton finance professor Jeremy Siegel told CNBC on Tuesday.
Tensions between the U.S. and China are high as U.S. Trade Representative Robert Lighthizer said Monday that new tariffs on 25% of goods will go through on Friday. Siegel said this causes major risk to the downside.
"If both sides dig in this market could go down 10% to 20%," Siegel said on "Squawk Alley." "It's a question of what happens on Friday. If it does happen on Friday, what is the retaliation of the Chinese? And that's totally dominating the market for the next two or three weeks."
Siegel said the market built in about a 90% chance that trade negotiations with China would be resolved. Since Trump's tweets on Sunday threatening to raise tariffs the market, the market now projects no more than a 70% chance of a resolution, he said. This change is what is shocking the market downward, he said.
Investors are waiting to see how the trade talks with China go this week but Trump will be watching the market, Siegel said.
"The strongest thing that Donald Trump has going for him in next year's election is the economy and the stock market. He cannot afford that to falter," said Siegel.
Siegel said Trump could survive a mini sell-off if he comes through with a strong trade deal in the end. However, most people don't like the volatility, he said.
The VIX, which is considered to be the best gauge of fear in the stock market, jumped more than 26% on Tuesday.