One of Wall Street’s most bearish strategists isn’t giving in to the bullish about-turn in equities, saying investors may be in for “a rude awakening.”

Morgan Stanley’s Michael Wilson, whose outlook for a market slump in 2023 has yet to materialize, said fading fiscal support, lower liquidity and falling inflation will weigh on the US equity rally in the second half of the year.

He’s also concerned that stocks are “as stretched as they can get” in a narrow performance that’s been driven by excess liquidity from March’s banking deposit bailouts.

“Given our fundamental view on growth, we find it hard to get on board with the current excitement,” Wilson wrote in a note Tuesday. “If second half growth re-accelerates as expected, then the bullish narrative being used to support equity prices will be proven correct. If not, many investors may be in for a rude awakening given the very big reach for risk we are seeing.”

According to Citigroup Inc. strategists led by Chris Montagu, the positioning in US equity futures is the most bullish since 2010. For them, the key question now is whether this momentum can continue or if rounds of profit taking and hedging will slow the market in coming weeks.

US equities have staged a powerful rally this year, driven mainly by a narrow group of big tech companies on bets that the boom in artificial intelligence will boost their profits. Despite the strong rebound, the so-called MACD momentum — which shows the relationship between two moving averages of a security’s price — is currently positive for both the S&P 500 and Nasdaq 100, according to data compiled by Bloomberg.

Wilson admits that his team has been “so wrong” about the S&P 500 this year that they’ve been looking at whether their earnings model is misleading. Yet they’ve decided to stick to their forecasts. Morgan Stanley expects slowing inflation to have a direct negative impact on companies’ revenue growth that’s not reflected in consensus forecasts.

According to Wilson, last week’s lower-than-expected producer prices release portends a sharp drop in revenue growth over the next four months. That “would imply that our well below earnings forecast is correct as the negative operating leverage does the heavy lifting.”

The strategists’ top relative trade ideas include being long consumer staples over discretionary, long defensives over cyclicals, long health care over technology and long companies with high operational efficiency over those with low efficiency. Morgan Stanley also recommends avoiding firms with high financial leverage as interest rates will remain elevated.

--With assistance from Michael Msika.

This article was provided by Bloomberg News.