The stock market's nightmare scenario of a 50% drop is now more likely after the 'stubborn' Fed's biggest rate hike in decades, hedge-fund strategist says

The Federal Reserve's decision to hike interest rates this week only increases the chances of an economic recession and a deep sell-off in the stock market.

As data shows a slow-down in inflation, the Fed is getting more aggressive in tightening financial conditions. Cecchini said that policy whiplash can lead to economic hardship for millions.

Cecchini said that the Fed's stubbornness to wait so long to raise interest rates could lead to a recession.

While the Fed is trying to tame inflation by lowering consumer demand for goods and services, it is actually supply side constraints and higher commodity prices that are driving the bulk of inflation.

It would have paid dividends for the Fed to kick off its interest rate hike sooner than it did, as that would have helped tame demand before supply chain constraints and higher oil prices added fuel to the fire.

Instead, the Fed is embarking on a fast and furious interest rate hike path that will likely include two back-to-back 75 basis point interest rate hikes in July, which follows a 25 basis point and a 50 basis point interest rate hike in March and May, respectively. The Fed did not expect to raise interest rates again until 2022.

Even after taking the S&P 500's year-to-date decline of more than 20% into account, investors could still see more pain in the stock market.

"Unfortunately, the risk-off scenario we articulated in late 2021, is beginning to play out, and the 70's drawdown scenario of almost 50% for the S&P 500 is becoming all the more likely."

If the S&P 500 were to fall 50% from its January peak, it would represent a potential downside of more than 30%.

Cecchini said that a double blow of contracting valuations and lower earnings forecasts should happen. Despite the recent market volatility, a 40-year record in inflation, and rising interest rates, Wall Street analysts have not lowered their corporate earnings estimates.

There's still room for investors to be disappointed by earnings, which could fuel further selling pressure as earnings typically drive stock prices in the long term.