PNC Financial's Amanda Agati is predicting the retail frenzy's downfall.
When the government starts eliminating stimulus policies intended to help the nation weather the pandemic, the firm's chief investment officer believes retail investors will hesitate to put new money to work.
"As we start to see this fiscal cliff appear on the near-term horizon, let's call it in September-ish and [as] the extended unemployment benefits are starting to roll off, I do think that mania around retail trading activity is going to start to fade," she said on CNBC's "Trading Nation" on Wednesday.
The impact could help tip the highly-valued market into a 5% to 10% pullback, according to Agati.
'We have to be really realistic'
"We have to be really realistic about how far and how fast the market has rallied and how far valuations have moved," she said. "The valuation backdrop is stretched by all standards: historical averages and otherwise."
On "Trading Nation" in early June, she recommended bracing for larger than normal price swings. Agati attributed the forecast to high valuations, Federal Reserve taper chatter and the winding down of stimulus policies.
The Dow fell 324 points or 0.92% on Wednesday. The S&P 500 also struggled, falling 0.46% The tech-heavy Nasdaq, which bounced between negative and positive territory, ended the day with a gain of 0.13%.
"We've started to see this rally get a little bit exhausted here and settle down," said Agati.
Agati is also listing Covid-19 variants and slowing earnings growth as top correction risks.
"The key to the path forward certainly is earnings growth and positive revisions," she said. "We are starting to see some slowing in terms of revisions for 2022. So, the key to keeping the market rally fueled is not just meeting this high bar in terms of earnings growth, it's exceeding it by a wide margin."
Due to the concerns, Agati's top play is to look abroad toward the emerging markets.
"I feel a little bit like a broken record as this has been a story for us really over the course of 2021," said Agati. "It's really that the brightest star in the equity asset class universe."
She's not letting the tensions surrounding Beijing regulators targeting U.S. listed China companies derail the strategy. Agati is viewing the uncertainty mostly as a sentiment overhang.
"The earnings growth backdrop is also very strong," Agati said. "That relative valuation spread versus the developed world is really attractive here."
The iShares MSCI Emerging Markets ETF, which tracks the space, is down 4.2% over the past month. So far this year, it's up 1.5%.