Why the worst may be yet to come for stocks as trade war tensions persist

Alicia Levine believes Wall Street is making a big mistake.

The chief strategist at BNY Mellon contends it's still not accurately pricing in the growing possibility that U.S.-China trade talks will ultimately fail.

"The market got the wake-up call on May 5, and it hit the snooze button — expecting this to go away with a tweet," she said Thursday on CNBC's "Futures Now. "

Levine is alluding to President Donald Trump's series of tweets on May 5 that threatened new tariffs.

Since then, stocks have been on a roller-coaster ride. The S&P 500 is down 4% and the Dow has fallen around 3.5%. The tech-heavy Nasdaq is off more than 6%.

"I think it gets worse before it gets better," she said. "The trade war is turning into a tech war, and this could go on longer. It could be deeper, and it could be harder to come up with a resolution."

To help insulate investment portfolios against the trade war fallout, Levine recommends going to an unloved portion of the market: health care.

"It was a dog. Nobody wanted to own health care, and the Democrats have been beating up on the health-care area because they want to introduce socialized medicine and single-payer," she said. "These multiples have gotten crushed."

Levine predicts the more popular defensive plays in this environment may soon face trouble.

"I'm worried about utilities and real estate just because they are the obvious trade, and I believe they're overpriced, " Levine said.

Read More