Investors should enjoy this recent market rally while it lasts, said Morgan Stanley’s Michael Wilson. The Wall Street firm’s chief U.S. equity strategist believes the recent rally, which follows the Federal Reserve’s aggressive action to reduce inflation, will not last long as corporate earnings are on track to begin to deteriorate. “While the bond market is starting to assume they have inflation under control, it may come at a higher cost than normal, potentially a recession while they are still adjusting, which may leave a very small window for stocks to perform before earnings surprise the market. downside,” Wilson said in a note to clients. “We think that window is now, but it could close quickly. Risk reward is low after the recent recovery, so trade accordingly as time may be running out,” he added. The S&P 500 just posted its best month since November 2020, gaining more than 9% in July, as investors’ fears about the aggressive pace of rate hikes began to ease and bets that inflation may have reached the maximum July’s rally followed an 8% selloff in June. Wilson, one of Wall Street’s biggest bears, said the earlier drop in stocks did not fully reflect the risk of a recession, as earnings tend to fall much more dramatically in a downturn. “While there was talk of a recession during that selloff and valuations hit our target P/E of 15.4x, we don’t think it properly discounted the damage to earnings that will come if we’re in a recession at this point.” , Wilson said. . If an economic downturn comes, the benchmark equity index could fall toward 3,000, or a 27% drop from Friday’s close, Wilson said. He added that the S&P 500 could bottom out in the 3,400 to 3,500 range if the US avoids a recession. The benchmark hit a low of 3,636.87 on June 17. — CNBC’s Michael Bloom contributed to this report.