Wall Street’s top strategist Mike Wilson is warning investors to prepare for a more than 20% drop in stocks.

Stocks could lose more than 20%, according to one of Wall Street’s most successful strategists, but he warned Tuesday that investors are not prepared for how bad things could get.

Speaking on CNBC Fast money Show, CIO and chief US equity strategist at Morgan Stanley, Mike Wilson, said the S&P 500 is vulnerable to a 23% drop. This will see the index fall to 3,000 from the current 3,900.

While there is broad consensus that a recession is looming, Wilson, the No. 1 stock strategist in the latest Institutional Investor survey, urged traders to take the impact of a potential economic contraction more seriously.

“While most institutional clients probably think we’re going to have a recession, they’re not afraid of it,” he said. “It’s just a huge disconnect.”

The Morgan Stanley CIO added that the upcoming earnings season will create volatility in markets as many corporate financials will come in below expectations.

“This is another area where investors are a little complacent — expenses are growing faster than net income,” he told CNBC. “The full-year estimate should come down. Negative operating leverage is really starting to flow from the balance sheet to the income statement… This is a much underestimated development during COVID. We won a lot during the pandemic because we had positive operating leverage.

He added: “When you actually talk to people, they talk about the bear game about the first half. But they are either not ready for it, or they don’t think it will be so bad.”

Investors suffered through the end of 2022 as US stocks suffered their worst year since the Great Financial Crisis due to the war in Ukraine, persistently high inflation, rising interest rates and economic uncertainty.

While many hope the Federal Reserve will begin to end its cycle of aggressive rate hikes if inflation continues to slow, Wilson said Tuesday he did not expect the central bank to take its foot off the pedal.

“Our call is largely based on earnings and that the Fed will not react to a slowdown as it has historically,” he said. “They’re not going to cut rates in proportion to the slowdown in growth.”

Will the stock market recover in 2023?

Wilson has long been one of Wall Street’s loudest bears when it comes to U.S. stocks.

Late last year, he warned investors to brace for the S&P 500 to hit a level between 3,000 and 3,300 during the first four months of 2023 — and it’s an idea he hasn’t shied away from.

His interview with CNBC came after a research note said corporate earnings forecasts were still too high, while the equity risk premium remained at its lowest level since before the 2008 financial crisis. He noted that this meant the S&P 500 could fall well below the 3,500-point level at which markets are priced in on the brink of a recession — with Wilson predicting a drop of up to 22% to 3,000.

The S&P is currently trading higher than the levels Wilson warned against, with the index closing above 3,900 on Tuesday.

Wilson’s year-end price target for the S&P 500 is 3,900.

While Wilson’s forecast is one of the lowest on Wall Street, many of the other big players expect the market to be less bullish this year.

a collection of public forecasts compiled by Luck At the end of last year, investment banks indicated that the average price target for the S&P in 2023 was around 4,000 points.

The S&P 500’s 2022 close of 3,839.50 to about 4,000 represents a positive jump from last year’s annual return, when it lost 18%, according to NYU, but still well ahead of the S&P’s 16.4% average annual return will be low. Between 2009 and 2021.

Others taking a cautious stance include Barry Bannister, chief equity strategist at Stifel, who in a research note on Monday predicted the S&P 500 could rise 10% to 4,300 by mid-June, but warned the rally would be a decade away. flat stock markets.

In November, strategists at Goldman Sachs warned that the bear market was far from over, predicting that the S&P 500 index would end 2023 at 4,000 points — up just 2% from Tuesday’s close.

This story was originally featured on Fortune.com

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