Wharton professor Jeremy Siegel says the stock market will surprise investors to the upside as cooling 'on the ground' inflation means the Fed won't hike rates to extremes

• The stock market is poised to surprise investors to the upside as inflation cools down, according to Wharton professor Jeremy Siegel.
• Siegel believes continued signs of easing inflation mean the Fed won't hike interest rates to extremes.
• "On the ground I don't see prices going up anywhere near the rate it did" in the past, Siegel said.

Stock market investors should be prepared for upside surprises as the Federal Reserve is unlikely to raise interest rates to extreme levels due to cooling inflation, according to Wharton professor Jeremy Siegel.

Siegel told CNBC on Monday that on-the-ground inflation isn't rising as fast as it used to, and that means the Fed could be nearing an end to its outsized interest rate hikes.

"I do think the Fed has decided that we are going to go 75 basis points" at next week's FOMC meeting, Siegel said, adding that the market expects another 75 basis points in rate hikes by year-end, which would likely entail a 50-basis-point rate hike in November, followed by a 25-basis-point hike in December.

"I think that should definitely do it because on the ground I don't see prices going up anywhere near the rate it did" in the past, Siegel said, adding that home prices are actually falling, though that won't be recognized in the official data for some time.

Additionally, investor sentiment is at extremely pessimistic levels, he observed, which sets the market up for positive surprises going forward.

"It seems like everyone that wants to be out of the market is out, and everyone that wants to be tactical is short. Therefore the surprises are going to be to the upside," Siegel explained.

There are many potential surprise catalysts that could catch investors off guard and send stocks soaring, according to Siegel. Aside from cooling inflation, those potential surprises include a falling dollar, a resolution to the Russia-Ukraine war, and better-than-feared economic results from Europe.

"Developments in Ukraine are moving quickly, this may mean some sort of settlement going forward. It looks like Europe maybe has prepared better than we had feared for the winter," Siegel said, rattling off a number of potential bullish catalysts for the stock market.

Additionally, a rebound in economic productivity in the second half of the year would be welcomed by investors and the Fed. "We get any rebound in productivity in the second half of this year, that's further pressure in prices which means the Fed doesn't have to go to an extreme," he said.

Ultimately, Siegel still believes the mid-June lows are indeed the lows for this current bear market cycle, and that investors should be prepared for head fakes as stocks enter a basing period and consolidate recent volatile swings.

"The truth of the matter is we have millions of pieces of news. When the market goes down we take from the pile that justifies the negative, when the market goes up we take from the pile that justifies the positive," he said. "When everyone has sold, only the buyers are left, and the shorts are exposed."