Morgan Stanley warns it's too early to be bullish on stocks — and predicts the S&P 500 will drop another 14% by August

Mike Wilson, top equity strategist at Morgan Stanley, said it was too early to be bullish on stocks.

Wilson predicted in a note Monday that the S&P 500 would fall to 3,400 by the end of the second-quarter earnings season. The benchmark index dropped to 3,946 on Monday.

The strategist said that equity clients are pessimistic, which is a necessary condition for a sustainable low.

While sentiment and positioning for active institutional investors is low, asset owner clients remain heavily exposed to equities. As they reallocate, this should weigh on equity prices.

The Federal Reserve and other central banks have hiked interest rates, Russia has invaded Ukraine, and the Chinese economy has slowed.

The S&P 500 has fallen 18% this year, putting it close to a bear market territory, which is a drop of 20% from recent highs.

Wilson was one of the first strategists to turn pessimistic about stocks, and has continued to warn investors that there is more to come.

He said on Monday that investors should use bear-market rallies to exit vulnerable parts of the market.

Morgan Stanley is concerned about the willingness of people to spend money during a period of high inflation. A survey by the bank found that more than half of consumers are planning to cut back on spending over the next six months.

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