Equities could fall sharply as U.S.-China trade relations worsen, hedge-fund titan David Tepper warned on Thursday.

Tepper told CNBC's "Halftime Report" that stocks could drop 5 percent to 20 percent if trade tensions between the world's two largest economies increase. "We may have to get used to that these tariffs just may be on," he said. "Then, there will be an adjustment in the stock market. ... Then you move up from there."

Tensions between the U.S. and China have been on the rise. Last week, President Donald Trump said he was "ready to go" on slapping tariffs on $267 billion in Chinese goods. These tariffs would come on top of those targeting another $200 billion in goods.

Equities, however, are still trading near record highs reached in late August. The is up more than 8.5 percent this year, while the Nasdaq Composite has surged 16.3 percent.

"I'm a little surprised at the level [the market] is right now," Tepper said. "I don't think everything is discounted at this price right now."

"I'm a very patriotic, American citizen," the co-founder of Appaloosa Management added. "I do think we have to protect our national jewels: our technology. So this is a very serious matter. And sometimes, when you have a serious matter, you may have to take a little pain. That's how it goes."

Founded in 1993, Appaloosa Management has about $14 billion in assets under management and is known for making big calls on the market. Tepper told CNBC in January the bull market had more room to run, citing lower taxes and favorable stock valuations.

Tepper also said Thursday that the current bull market is in the "late innings" and that he has sold some of his stock holdings.