Veteran fund manager issues dire stock market warning originally appeared on TheStreet.

The stock market loves climbing a wall of worry.

We've certainly seen that over the past two months. Despite worry over mounting U.S. debt and tariff impacts on inflation and the economy, the S&P 500 has rallied 20%. Technology stocks have done even better. The Nasdaq Composite, home to most tech leaders, is up 27%.

The rally since President Trump paused most reciprocal tariffs announced on April 2, so-called "Liberation Day," for 90 days has been impressive.

However, there's good reason for concern, especially since the S&P 500 is challenging all-time highs and its valuation is arguably becoming frothy again.

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The risk that stocks could lose some of their luster after their rally has caught the attention of many Wall Street veterans, including long-time hedge fund manager Doug Kass.

Kass has been navigating the markets since the 1970s, including as research director for Leon Cooperman's Omega Advisors, and his experience through good and bad times helped him correctly predict the sell-off earlier this year and the market bottom in April.

This week, Kass updated his stock market outlook, including a surprisingly long list of red flags for why investors should be cautious.

The best set-up for tantalizing returns is a market that's oversold enough to have reset forward price-to-earnings ratios to levels near the lower end of their historical averages.

In February, when stocks were notching all-time highs right before the tariff-fueled reckoning, the S&P 500's P/E ratio eclipsed 22, and most sentiment measures were flashing overbought.

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The sell-off through early April erased much of that frothiness, driving the S&P 500's P/E ratio to 19 and below five-year averages of 19.9 — not bargain-basement priced, but low enough to help catapult stocks from severely oversold readings. As a reminder, CNN's Fear & Greed indicator was at "Extreme Fear," and bearishness by most measures was sky high in the days after the April 2 tariff announcement.

Now that the stock market is back near its highs, sentiment has turned optimistic again, with CNN's measure flashing "Greed." Because earnings forecasts haven't materially increased, the S&P 500's P/E ratio is north of 21 — hardly cheap.

"Valuation multiples expanded in a relief rally from mid-April to now and the S&P 500 now trades at 21x forward earnings, 35% above average," wrote Bank of America analysts to clients on June 14. "The index looks statistically expensive relative to its own history on all 20 of the valuation metrics we track."