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

• It's too early to be bullish about stocks despite the recent sell-off, Morgan Stanley's Mike Wilson said Monday.
• The strategist said he expects the S&P 500 to fall another 14% by the end of second-quarter earnings season, to 3,400.

It's too early to become bullish on stocks despite the major sell-off so far this year, according to Morgan Stanley's top equity strategist Mike Wilson.

Wilson predicted in a note Monday the S&P 500 would fall to 3,400 by the end of second-quarter earnings season, which is typically in August. That's a roughly 14% drop from the benchmark index's 3,946 level on Monday.

The strategist said equity clients are "bearish" — meaning pessimistic — which he said is "a necessary condition for a sustainable low, but an insufficient one."

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

Stocks have fallen sharply this year as the Federal Reserve and other central banks have hiked interest rates; Russia has invaded Ukraine; inflation has rocked economies; and Chinese growth has slowed.

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

Wilson was one of the earliest strategists to turn pessimistic about stocks, and has continued to warn investors that there's further to fall.

He said on Monday so-called bear-market rallies — periodic rises in stocks during a sell-off period — should be used by investors to exit vulnerable parts of the market.

The strategist said Morgan Stanley is particularly concerned about the willingness of people to spend money during a period of red-hot inflation. A survey by the bank found more than half of consumers are planning to cut back spending over the next six months.

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