The stock market may have trimmed its recent losses, but investors can't relax just yet, according to Morgan Stanley chief U.S. equity strategist Mike Wilson. Last week, the S & P 500 climbed 6.6% to break a seven-week slump. The Dow also gained more than 6% to snap an eight-week slide. However, Wilson said in a note to clients on Tuesday that the recovery looks more like a bear market rally that is already running out of steam. "Outside of a peace agreement in Ukraine, it's difficult to construct a case for more than a bear market rally, which could carry another 5%, in our view," Wilson wrote. In the near term, the S & P 500 could rise to the range of 4,250-4,300 before falling back down 3,400 by the end of the second-quarter earnings season in mid-August, Wilson wrote. Nasdaq and small cap stocks, which fell more than the S & P 500 during the spring decline, could see stronger rallies on a percentage basis, he said. Wilson turned bearish on the market earlier than many other top Wall Street strategists, repeatedly warning of a "fire and ice" scenario that included a major correction for stocks. The main reason that this latest rally can't be trusted is that inflation isn't yet solved, according to Wilson. "The bottom line is that inflation remains too high for the Fed's liking and so whatever pivot investors might be hoping for will be too immaterial to change the downtrend in equity prices, in our view," he wrote. There is also some evidence that economic growth is slowing, which could weigh on stocks in coming months. Wilson said that earnings estimates will likely shrink, creating more downside for the market. "We are making progress on that trend as earnings revisions breadth for the overall market dipped into negative territory last week—meaning that there are more downward than upward revisions for the overall market, a dynamic that often precedes a consolidation in forward EPS," he wrote.
