Morgan Stanley’s top equity strategist Michael Wilson has once again reiterated his bearish stance in a note sent to clients over the weekend.

Wilson, who correctly predicted that US equities will tumble in response to Fed’s hawkish actions, is now saying that stocks have much further to fall. According to the strategist, investors now realize that growth is slowing down. We should be thankful for Q1’s earnings season.

“First, while most companies handily beat consensus EPS forecasts, the bar had been lowered during the quarter more than usual. Additionally, there was an increase in the number of earnings revisions that were negative or positive. As incremental operating margins for many businesses and industries were extended, third-party stocks, as well as large-cap technology companies, saw their earnings quality decline. The 2Q estimate for the declined while the full-year forecasts remained unchanged. This effectively raises the bar for the second half of the year, which is about the time the economy will be feeling the effects of higher rates and other headwinds,” Wilson told clients.

More importantly, Wilson notes that the market has positioned for the higher rates, but adds that “we’re just not there yet.” On what needs to happen so that selling is overdone, Wilson says that either valuation fall to levels (S&P 500 multiples in a range of 14-15) or earnings estimates get cut.

“With valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally. We are confident that lower prices remain ahead after that. In S&P 500 terms we think that level is close to 3,400, which is where both valuation and technical support lie,” the strategist concluded.

By Senad Karaahmetovic