Money manager Kevin Nicholson expects the stock market to stabilize and rise in early 2021.
But the co-chief investment officer of global fixed income at RiverFront Investment Group warns it'll come at a cost to the jobs market.
"Companies are going to right-size their business," Nicholson told CNBC's "Trading Nation" on Thursday. "This is going to create the divergence between the economy and the market."
According to Nicholson, it'll be a major setback to the economic recovery from the Covid-19Â due to the hit to consumption.
"A lot of these workers who were furloughed will not end up going back to work," he said. "They're going to become permanently unemployed."
Nicholson already sees the trend unfolding in this week's layoff announcements from Citigroup and Wells Fargo.
'The pandemic pledge'
"The pandemic pledge that a lot of companies put out there will go away as they move towards focusing on profitability," he noted.
As for the remainder of the year, Nicholson expects a sideways market that's driven by volatility. His base case is the S&P 500 will be trading between 3,400 and 3,450 until January. On Thursday, the index closed at 3,357 and is more than 6% off its record high.
He's also bracing for more wild swings among the mega-cap technology names.
"From the bottom of March 23 to the end of August, tech was up over 80%. So, we expect it to have such pullbacks," said Nicholson, who manages $7 billion in assets. "The rest of the market isn't as overvalued as tech."
His strategy is to pare down the year's winners and gradually increase exposure to economically sensitive stocks such as energy and financials.
"You want to cut down on the exposure that you maybe have in technology. Take some of the profits because technology has had a huge year," Nicholson said. "You can use some of those profits to move into some more cyclicality into your portfolio."
