Morgan Stanley's Michael Wilson, known for being one of Wall Street's most bearish strategists, said he's expecting stocks to rally in the short term.
Wilson pointed to the S&P 500's resilience at the 200-day moving average last week, a widely-monitored technical indicator of an index's momentum against its current price.
The bounce off the line suggests it may now act as a support for the benchmark. Wilson said the index is likely to move higher if Treasury yields and the dollar continue to decline.
"Equity markets survived a crucial test of support last week that suggests this bear market rally is not ready to end just yet," the strategist wrote in a note Monday.
The index snapped a three-week losing streak Friday as investors bet that the Federal Reserve won't raise interest rates beyond peak levels already priced in. Wilson — who correctly predicted the selloff in stocks last year and the rebound in October — sees the next resistance for index at 4,150 points — about 2.5% higher than Friday's close.
The strategist doesn't expect the rally to last long. He said markets have further to fall in the medium term, as fundamentals continue to deteriorate, especially on the earnings front.
Despite the rally, "we believe it does not refute the very poor risk reward currently offered by many stocks given valuations and earnings forecasts that remain way too high, in our view," Wilson said, expecting margins to disappoint the current consensus "by a large amount."
