Fast Money

'Bear market rally' is setting stage for a correction, Morgan Stanley's Mike Wilson warns

We are doubling down on defensives because a correction is likely imminent, says Mike Wilson
We are doubling down on defensives because a correction is likely imminent, says Mike Wilson

A major Wall Street firm is on correction watch.

Despite the latest market bounce, Morgan Stanley's Mike Wilson is bracing for an S&P 500 decline of at least 13% between now and September.

Wilson cited technical headwinds on CNBC's "Fast Money" on Monday.

"It does have all the hallmarks of what I would call a bear market rally," said the firm's chief U.S. equity strategist and chief investment officer. "Things got oversold."

He also singles out the tech-heavy Nasdaq, which rallied almost 2% on Monday. It's up more than 13% over the past three weeks.

"The Nasdaq has run into resistance again here.... throwing back into the 200-day moving average," Wilson added. "It's a good time to remain defensive because, look, we're late cycle."

He has been worried the inflation surge and Federal Reserve's tightening policy increases recession risks. It could create an environment, according to Wilson, where stocks perform worse than bonds.

"We don't think there's a recession this year. But maybe next year there could be one," Wilson said. "So, the markets are going to trade defensively."

Wilson, the market's biggest bear, believes the S&P 500 will ultimately end the year at 4,400 — about a 9% drop from the index's all-time high hit on Jan. 4.

'We're doubling down on defensives'

"We're doubling down on defensives," Wilson wrote in his Monday research note. "Growth is becoming the primary concern for equity investors rather than higher rates."

Wilson's market playbook includes utilities, consumer staples and health care to outperform.

On "Fast Money" last winter, he also touted the merits of stock picks with defensive qualities and a burst below 4,000.

"I need something below 4,000 to get really constructive," said Wilson on Jan. 24. "I do think that'll happen."

Now, he's open to toning down his bearishness if the Fed doesn't raise rates as fast or as hard.

"That's probably off the table given the inflation that's out there," noted Wilson. "But that would be a real elixir that would allow the markets to probably go a little bit further."

He also lists better-than-expected earnings as a potential upside wildcard. First quarter earnings season begins a week from Wednesdays.

"If we're going to be wrong, it's going to be on earnings. It's not going to be because financial conditions loosen up again," Wilson said. "It's going to be because earnings don't disappoint as we're expecting as we go through the year."