Wall Streets top strategist Mike Wilson warns major stock market could fall 20% before expected bottom this fall

The worst is yet to come, a leading Wall Street strategist warned, as investors eye their outlook after a lackluster end to February trading.

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All three major US equity benchmarks lost last month when the Dow Jones fell to its lowest level of the year so far, but Morgan Stanley’s chief US equity strategist, Mike Wilson, says the S&P 500 will be the next index to collapse.

Speaking Bloomberg the Openthe faithful bear voted for the No. 1 equity strategist in an October survey Institutional investorsaid he expects earnings to continue to fall, which in turn could cause the stock market to fall anywhere from 5% to 20% from current levels near 4,000: “Our work suggests it’s closer to 20% from here will fall, so , low three thousand.”

Reasoning his pessimistic view, he explained, “We don’t have a crystal ball, of course, but what we can say with confidence is that the equity risk premium and multiples don’t reflect the earnings risk that we see.”

Wilson says this is happening for two reasons: First, investors have become more optimistic about the economy. “Three months ago, most institutional clients thought a recession was very likely; now they think it’s not so likely,” he said. “So that’s a big sea change.”

He says the second reason is the high level of liquidity in the markets: “Global money growth has more than offset what the Fed was trying to do with tightening financial conditions and has created an exuberant environment for asset prices. is not tenable in our view.”

Bottom of October?

While forecasters continue to apply their pressure recession forecasts in the second half of the year, some investors are looking at October as the month when markets could finally bottom out. Wilson himself didn’t name an exact month, but he sees the market continuing its downward movement: “We just don’t think the bear market is over because the earnings recession is far from over.”

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As for the downward earnings trend, Wilson added that the market was supported by economic data that was “slightly better than expected,” leading investors to believe the earnings declines were over. He countered, “Some people think the worst is behind us; we think the worst is probably ahead of most companies.”

This isn’t Wilson’s gloomiest outlook, even in recent weeks. In a February 20 memo, he wrote that investors were in the “death zone,” having “followed stock prices to dizzying heights once again, as liquidity (bottled oxygen) allows them to climb into a region they know they wouldn’t have to go and not be able to live very long.”

He added that investors, largely in the S&P 500 market, are climbing into “the pursuit of the ultimate topping out of greed” with the expectation that they will be able to bounce back without “catastrophic consequences.” However, he added: “Oxygen eventually runs out and those who ignore the risks get hurt.

Waiting for the ‘pain point’

Wilson’s call came as bank of America warned that the Fed will be willing to keep raising interest rates until the “consumer pain point” is found to bring inflation under control.

In a memo seen by Fortunewrote economist Aditya Bhave: “At this stage, rate hikes of 25 bps in March and May appear very likely. We recently revised our Fed forecast to include an additional 25 bps hike in June. But the resilience of the demand-driven inflation means the Fed has to raise interest rates closer to 6% to get inflation back on target.

This story originally stood on Fortune. com

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