A soaring US dollar will force the Fed to pivot away from its interest rate hikes, but that won't be enough to prevent an earnings recession, Morgan Stanley says

Morgan Stanley's Mike Wilson said in a Monday note that it appears increasingly likely that the Federal Reserve will pivot away from its current monetary policy.

The Fed will have to do the same thing as the Bank of England did last week by buying long-dated bonds to stem the rise in gilt yields.

When is the US dollar a problem? Wilson said that more price action would eventually get the Fed to back off.

He said that investors shouldn't put too much stock into the Fed's decision. The upside from a Fed pivot is likely to be offset by potential stock market downside from an earnings recession.

According to Wilson, the earnings decline will be driven by several macro risks that companies have been forced to navigate in recent months.

Wilson said that the uncertainty that these factors foster will lead to both guidance pulls and lowered guidance. Since mid- June, forward earnings estimates have fallen by just 1%, so the expected decline in earnings expectations could be big.

It takes a long time for earnings per share to fall for the S&P 500 because it's a very high quality, diversified index and companies are loathe to throw in the towel until they have to. More companies are reaching that point where they can no longer fight it.

Wilson wants the S&P 500's forward earnings estimates to fall to $225 or below before he believes that a sustainable low has been made in the stock market. The S&P 500's forward earnings per share estimate is $237.

In the absence of a Fed pivot, the stock market is likely to go down. A Fed pivot can lead to a rally because we are oversold.