(Bloomberg) — The Federal Reserve’s march toward higher rates presents greater risk for stock investors, and the likelihood of a correction in the S&P 500 next year is “elevated,” says BofA’s Savita Subramanian.

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“We are in an environment where the dividend yield on the S&P 500 is below where cash yields are likely to be in a year or two,” BofA Securities Inc.’s head of U.S. equity & quantitative strategy said in an interview on Bloomberg TV’s Surveillance on Friday. “Our economists are forecasting eight hikes over the next couple of years.”

Investors should own companies that can weather higher rates and market volatility, “but you don’t necessarily want to own the entire S&P 500,” she said. “I do think the probability of a 10% correction in the near term or over the next 12 months is elevated.”

To be sure, the BofA strategist says she doesn’t “want to sound too alarmist,” and expects stock indexes will be able to avoid losses. “Our market forecast is flat,” she said. “It is going to be a tough grind.”

In a Nov. 23 research note, Subramanian forecast the S&P 500 Index to be at 4,600 at the end of 2022, up slightly from yesterday’s close but down more than 100 points from a high reached in November before the omicron variant of the coronavirus emerged, disrupting global markets. In the note, she recommended energy, health-care and financial shares and to avoid consumer stocks.

Subramanian sees risk in the current negative real-rate environment, that is, that rates are being kept low while the Fed provides greater liquidity to the financial system, even as U.S. inflation is above 6%, the highest in three decades.

“This reminds me of 2000, when we all accepted a negative equity risk premium as normal,” she said. “This is not normal. Negative real rates are abnormal, and I think they’re telling us that something is essentially wrong.”

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The higher interest rates that are coming will show that “the bubble right now is not in stocks,” Subramanian said. “It’s in bonds.”

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