Long-term market bull Jeremy Siegel expects a serious pullback that isn't tied to Covid-19 surge risks.
His tipping point: a drastic change in Federal Reserve policy in order to deal with hot inflation.
"If the Fed suddenly gets tougher, I'm not sure that the market is going to be ready for a U-turn that [chair] Jerome Powell may take if we have one more bad inflation report," the Wharton finance professor told CNBC's "Trading Nation" on Friday. "A correction will come."
The consumer price index surged 6.2% in October, the Labor Department reported earlier this month. It marked the biggest gain in more than 30 years.
Siegel criticizes the Fed for being far behind the curve in terms of taking anti-inflationary action.
"Generally, since the Fed has not made any aggressive move at all, the money is still flowing into the market," Siegel said. "The Fed is still doing quantitative easing."
He speculates the moment of truth will happen at the Fed's Dec. 14 to Dec. 15 policy meeting.
If it signals a more aggressive approach to contain rising prices, Siegel warns a correction could strike.
Despite his concern, Siegel is in stocks.
"I am still pretty fully invested because, you know, there is no alternative," he said. "Bonds are getting, in my opinion, worse and worse. Cash is disappearing at the rate of inflation which is over 6%, and I think is going higher."
Siegel anticipates rising prices will stretch out over several years, with cumulative inflation reaching 20% to 25%.
"Even with a little bit of bumpiness in stocks, you have to be wanting to hold real assets in this scenario. And, stocks are real assets," he noted. "All that which in the long run is going to maintain value."
But it depends on the company.
"If interest rates go up, the very high-priced stocks which discounts cash flows way into the future... [are] going to be affected because of the discounting mechanism," he added.
Siegel attributes growth stocks' record strength to Delta variant fears and falling Treasury yields. He predicts the Covid-19 surge will subside as more people get boosters.
"That has stopped the so-called reopening trade," he said. "Value has gotten very cheap."
"[Financials] have been selling off recently with the lower interest rates," Siegel said. "They could come back."