Morgan Stanley’s Michael Wilson said investors should enjoy the market’s recent rally while it lasts. The Wall Street firm’s chief equity strategist believes the recent rally, following aggressive action by the Federal Reserve to reduce inflation, won’t last long – as corporate earnings are supposed to start bad head. “While the bond market is starting to think they have inflation under control, it could come with heavier-than-usual costs, potentially a recession while they’re still tightening, which could leaves a very small window for the stock to perform before earnings surprise on the downside,” Wilson said in a note to clients. “We think that window is present but it could close quickly. Risk-reward is poor after the recent rally, so trade accordingly when time may be running out,” he added. The S&P 500 Index just recorded its best month since November 2020, gaining more than 9% in July, as investors’ concerns about the pace of strong interest rate hikes began to wane and they booked Bet that inflation may have peaked. The rally in July follows the 8% sell-off in June. Wilson, one of Wall Street’s biggest bears, said the previous drop in stocks did not fully reflect the risk of a recession because earnings typically fall much more sharply during a recession. “Despite talk of widespread recession during that sell-off and valuations that hit a target P/E of 15.4x, we don’t think it will discount the losses properly,” Wilson said. earnings would have been if we were actually in a recession right now,” Wilson said. If a recession arrives, the equity benchmark could fall to 3,000, or about 27% off Friday’s close, Wilson said. He added that the S&P 500 could bottom out between 3,400 and 3,500 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.