The stage is set for 2 rate cuts this year, but investors need to be careful adding more exposure to the stock market, JPMorgan strategy chief says

• Recent data sets the Fed up to cut interest rates twice this year, JPMorgan's David Kelly said. 
• The bank's chief global strategist predicted Fed rate cuts were coming in September and December.
• Yet, he warned that stocks are expensive, and investors should be wary of adding exposure at high valuations. 

The Federal Reserve is poised to cut interest rates twice in 2024 as data shows the economy gradually slowing, but bullish investors have to be careful as sky-high stock prices are at risk of a big correction, according to JPMorgan Asset Management's David Kelly.

The chief global strategist predicted central bankers would begin dialing back interest rates at the September policy meeting, with another cut likely in December.

That's made possible by a cooling economy, he added, pointing to the latest jobs report, which showed the unemployment rate ticking up to 4.1%, the highest reading in nearly three years.

But rate cuts shouldn't be the signal for investors to flock to the stock market, Kelly said. He pointed to sky-high valuations, with the S&P 500 blowing notching record after record this year.

"This is a time where we've gotta be pretty careful here, because valuations are high. We've had a huge rally last year and this year," Kelly told CNBC on Friday. "Overall, these markets are high, and sooner or later we're going to have a significant correction, and what I know about previous corrections is, when you're in a correction, you don't want to be in the most expensive stuff."

The S&P 500 has gained 17% so far this year. That's partly due to enthusiasm over Fed rate cuts and the market's undying excitement for artificial intelligence, with mega-cap tech stocks carrying most of the gains for the benchmark index.

"In some ways, the economy is building bubbles in markets because it is so steady. But we have seen this continued move upwards in equity prices. I think it's a time when people need to be very careful about diversifying their exposure and not being overexposed to the most expensive names," he added.

Kelly's stance mirrors that of other bearish forecasters, who have warned of a correction on the horizon as stocks look overvalued. By some measures, the S&P 500 looks to be the most overvalued since prior to the 1929 stock crash, according to legendary investor John Hussman, who has said a 70% decline in stocks wouldn't be surprising.