Wall Street's most determined bulls issued a warning: if oil prices and the bond market deteriorate further, the S&P 500 may drop to 7100 points first

The Zhitong Finance App learned that Morgan Stanley strategists said that the US stock market is vulnerable to further increases in energy prices and increased volatility in the bond market. They believe that under this scenario, the S&P 500 index may fall by up to 7%.

The team led by Michael Wilson said that although strong corporate profits have helped stock prices carry higher bond yields so far, the valuation of the S&P 500 has fallen to its lowest level since March in the past four months.

Wilson wrote in a report, “If the recent tightening of the financial environment and/or a sharp rise in energy prices further worsen the valuation correction, we think the S&P 500 index may drop to a minimum of 7100 points before the bull market restarts before the end of the year.”

This level represents a 7% drop from the index's closing price last Friday.

Wilson also anticipates that volatility will rise before and after the November midterm elections, but in the end, he believes that the company's profit prospects are steady and will drive a year-end rebound towards its target of 8,000 points. This is equivalent to an increase of nearly 5% from current levels.

The S&P 500 index has continued to fluctuate since hitting an all-time high in mid-August due to market concerns about the outlook for inflation, while 10-year US Treasury yields hovered around 5%. The WTI price has fallen back below $100 per barrel, but is still 43% above the July low. The Federal Reserve raised interest rates last week for the first time in three years.

Despite this, the central bank's determination to fight inflation has left investors bullish. The benchmark stock index is currently only about 2% below its peak, and the stock price is supported by one of the best earnings seasons on record in the second quarter.

Market strategists, including J.P. Morgan Chase and Goldman Sachs, also said that healthy profits should continue to benefit the stock market, but the Bank of America team warned that as profit growth slows down, investor positions are still too bullish.

Morgan Stanley's Wilson is one of the staunch bulls in US stocks this year. He reiterated his recommendation for large-cap, high-quality stocks and said that momentum in the service-oriented, asset-light industry is building up.