The S&P 500 index hasn't endured a 10 percent correction since October 2011 and now stands less than 1 percent beneath its record high.
But that could change soon, says former Dallas Federal Reserve President Richard Fisher.
"Are we vulnerable in my personal opinion to a significant equity market correction? I do believe we are, and the reason for that is people have gotten lazy. They've depended totally on the Fed," he told CNBC
What he means is that investors are dependent upon the Fed's massive easing program for the stock market's strength.
The Fed has kept its federal funds rate target a record low of zero to 0.25 percent since December 2008. But many analysts expect the central bank to begin raising rates in September.
"As the economy improves, things are going to change," Fisher said. "Over time the [Fed] will engineer normalization [of policy], however long that takes. And I think the market should get prepared for that."
He does see a correction of "substantial magnitude" taking place, but the Fed shouldn't react.
"I've argued that at the [Fed] table because after all this market's hyper-overpriced in my view, and these interest rates are abnormally low, engineered by the Fed. But that's because nobody else is doing anything on the fiscal policy side and we had to act."
Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund manager, also sees equities as vulnerable. When the Fed finally does raise interest rates, there could be heck to pay in the stock market, he says.
Indeed, we could see a repeat of 1937, he and colleague Mark Dinner write in a note to investors obtained by the Financial Times
. In that year, the Fed tightened policy prematurely after the crash of 1929. This led to the Dow Jones Industrial Average falling by one-third in 1937 and continuing to decrease in 1938.
"We don't know — nor does the Fed know — exactly how much tightening will knock over the apple cart," the duo say.
"What we do hope the Fed knows, which we don't know, is how exactly it will fix things if it knocks it over. We hope that they know that before they make a move that could knock over the apple cart."
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