But he said investors shouldn’t think the bear market has ended just yet, pointing specifically to the outlook for earnings as a reason to remain cautious. And he said a pause in interest rate hikes — once seen as a positive step towards a lower-rate environment — could only increase the bearish sentiment in the market.

The Federal Reserve’s Expected Interest Rate Policy Announcement

His comments come with two days until the Federal Reserve’s expected interest rate policy announcement, where investors will be watching for any updates to the path of rates and for commentary from Fed Chair Jerome Powell around the state of the economy. (There’s a 74% chance the Fed will skip a rate hike at this week’s meeting, according to CME Group’s FedWatch tool, which would break the streak of 10 consecutive increases.)

The S & P 500 Rally and the Bear Market

“With the S & P 500 rally now crossing the 20% threshold, more are declaring the bear market officially over,” he said in a note to clients Monday. “We respectfully disagree due to our 2023 earnings forecast. Ironically, a Fed pause may awaken the bear tactically just as liquidity headwinds ramp up.”

Morgan Stanley’s Fundamental View and the Expectation for 2023 Earnings

Investors have turned bullish, Wilson said, with the S & P 500 clearing a key benchmark: a 20% rally off October lows. The firm’s 2023 fundamental view has recently fallen “very much out of consensus,” he said, with the expectation for 2023 earnings even further below Wall Street consensus as other firms have grown more optimistic. That growing disparity between Morgan Stanley and peers on the Street is due to the firm’s inability to get more optimistic on earnings.

In fact, Wilson said many will likely be surprised by just how much earnings fall this year — and then the strength of the rebound in 2024 and 2025. Together, he said that creates a boom-and-bust cycle, with earnings currently in the “bust” phase. He said the current bear market is similar to the market between 1946 and 1948, which also saw a boom-and-bust story.

Earnings Recessions and Historical Analysis

Excess savings were built up in both World War II and the Covid-induced lockdowns, only to flood the economies at times when supply was constrained. That pushed inflation up in both cases. Over the last seven decades, earnings recessions have typically bottomed close to around 16% down. A historical analysis shows the expected drawdowns needed to reach the firm’s 2023 estimate of $185 by the end of the year have been seen in prior earnings recessions, Wilson said. And Morgan Stanley’s 2024 estimate of 23% earnings growth reflects the firm’s expectations for a bounce-back.

— AsumeTech’s Michael Bloom contributed to this report