Trading legend Art Cashin is skeptical of the sentiment-driven rally and warns a 'bump in the road could turn out to be a landmine'

• The current market upswing is largely sentiment driven, Wall Street trading legend Art Cashin said.
• "Short of going absolutely parabolic, this has been some dramatic, pyrotechnic run on this rally."
• But it will mean that small, future challenges could have outsized market reactions.

Legendary trader Art Cashin is skeptical of the stock market rally and said a hiccup could quickly unravel investors' optimism.

The warning comes as the market wraps up a strong second quarter that extended year-to-date gains. In the first haf of 2023, the Nasdaq is up 30%, and the S&P 500 is up 15.5%.

"I can't overstate how strongly sentiment has taken over," Cashin, UBS director of floor operations, told CNBC on Friday, pointing to fear of missing out. "I think, short of going absolutely parabolic, this has been some dramatic, pyrotechnic run on this rally."

Asked if there's an "unknown unknown" that could undo the rally in the second half of the year, he said that's possible.

Because the rally has relied so heavily on sentiment instead of fundamentals, he suggested that it's fragile.

"Sentiment is so great that a bump in the road could turn out to be a landmine," Cashin said, later adding, "so far the trend is going. Am I skeptical? Yes."

This year's stock surge has been led by the tech sector as hype around artificial intelligence has lifted names like AI chip leader Nvidia. Mainstays like Apple have also rallied, with the iPhone maker reaching a $3 trillion market capitalization on Friday.

Meanwhile, a slew of upbeat economic data has raised hopes that the US economy could avoid a recession. However, that could also force the Federal Reserve to stay hawkish, and officials have said more rate hikes are coming to get inflation back to their 2% target. 

Though a rate hike was skipped in June, Chairman Jerome Powell predicted 2% inflation is unreachable until at least 2025.

Yet, higher rates are "not really in anybody's plan," Cashin warned. "If they're going to move significantly higher, everything could change. You could go to negative payrolls and whatever."

Still, he acknowledged, "But for now, the sun is shining, the Roman candles are bursting, and everybody's happy."