Potential Federal Reserve rate hikes starting this week could spur a correction in the S&P 500 as reduced corporate margins hurt profit outlooks, according to Macro Risk Advisors LLC.

The S&P 500 has dropped nearly 1% in September, historically its weakest month, amid concerns over elevated energy costs and inflation data that drove US 10-year Treasury yields above 5% for the first time since 2023. Traders now almost fully price in a quarter-point hike by Fed Chairman Kevin Warsh on Wednesday, up from about 60% odds a week ago.

A hike is likely to lead to more pain, said Dean Curnutt, CEO and founder of Macro Risk Advisors. "We expect an 8-10% pullback in S&P with a potential second leg in December," he wrote. Rate hikes will "compress margins in companies that cannot pass costs through" and deliver a volatility shock.

Curnutt compared the setup to 2018, when the S&P 500 peaked in September and plunged 10% over October and November. That year, "the Santa Claus rally did not come," and the market dropped almost 20% from its peak. He expects another leg lower in December, favoring a defensive posture.