• US stocks could plummet as much as 30% over the next two months, Larry McDonald said.

• "The Bear Trap Report" founder sees higher interest rates choking demand and hammering the economy.

• McDonald also predicts investors will swap stocks for bonds to earn higher yields.

US stocks could plunge up to 30% within the next two months as surging interest rates squeeze consumers and jaded investors swap equities for bonds, Larry McDonald has warned.

The founder of "The Bear Trap Report" told Fox Business on Wednesday that his set of 21 systemic risk indicators "point to one of the highest probabilities of a crash in the stock market looking out 60 days."

McDonald highlighted the Federal Reserve hiking rates from nearly zero to upward of 4.5% within the past year, in an effort to curb historic inflation.

Higher rates lift borrowing costs and encourage saving over spending, which can help cool the pace of price increases. However, they can also pull down asset prices, increase unemployment, and temper consumer spending, raising the risk of a recession.

McDonald estimated that every 1% increase in rates translates into a $50 billion rise in costs for middle-class Americans. He noted that interest rates on US auto loans are approaching 14%, and nearly 20% of those loans cost over $1,000 each month.

"The withdrawal of capital from the middle-class families is so spectacular," McDonald said. "The middle-class families are getting hammered here, and so the consumer pressure's violent."

The former Lehman Brothers trader — and author of a book about the bank's collapse at the start of the financial crisis — also flagged investor frustration as a risk factor.

People who invested in the S&P 500 two years ago have made virtually no gains, he noted. They might increasingly view a risk-free return of over 5% from government bonds as appealing, he argued.

Moreover, McDonald pointed to mounting signs of an impending economic downturn. He singled out the current inversion of 2-year and 10-year Treasuries — a classic recession indicator — and the recent underperformance of regional banks.

"There are really massive cracks under the surface, and that's why the market probably goes down 10%, 20%, maybe 30% in the next 60 days," McDonald said.

The finance guru brushed off the blowout jobs report in January. He noted the labor market was booming just before the dot-com crash, and employment data has historically softened in February and March.

He suggested weaker jobs figures over the next couple of months could trigger a crash, as they would fuel doubts about whether S&P 500 companies can hit Wall Street's earnings forecasts. Companies' stocks are typically valued relative to their profits, and could see their prices slashed if earnings disappoint.

McDonald isn't alone in predicting a market slump. "The Big Short" investor Michael Burry, GMO cofounder Jeremy Grantham, and veteran economist David Rosenberg have all rang the alarm on stocks in recent weeks.

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