Here's how far the S&P 500 could drop before the bull rally resumes, according to Morgan Stanley's CIO

• The S&P 500 could drop as much as 7% in the next month, Morgan Stanley says.
• The bank's CIO said he sees short-term downside before the index can resume its bull rally.
• Stock corrections typically don't end unless the "best" companies on the market get hit, he said.

The stock market is down year to date, but it might have to fall even further before it can resume its bull rally, a top Wall Street strategist said.

Mike Wilson, the CIO and chief US equity strategist at Morgan Stanley, said the bank believed stocks were headed for more pain, tumbling as much as 7% before the sell-off ends early next quarter.

Though stocks have already taken a hit from the US-Iran war, market corrections typically don't end until the "best" companies and "highest quality" indexes on the market see significant damage, he said, a condition that hasn't been met yet with the market's latest dip.

"While much of the damage has likely been done to the most vulnerable parts of the equity market, the index remains vulnerable to another 5%-7% downside in my opinion, while crowded stocks could see double digit declines before a final low appears next month," Wilson said, speaking on an episode of the bank's "Thoughts on the Market" podcast this week.

Wilson pointed to how equities tanked around 20% after President Donald Trump introduced his slate of reciprocal tariffs last year.

The S&P 500's losses so far this year, by contrast, haven't been nearly as devastating. The benchmark index is down 1% for the year, despite heightened volatility from fears about AI and geopolitical conflict.

The year-over-year comparison of the S&P 500 is critical when thinking about support levels for the index, he added.

"Given the sharp decline last year, it tells me we have another month during which the equity markets are likely to struggle," Wilson said, referring to the tariffs-fueled sell-off last April.

"Based on this simple observation and other technical indicators, I think the S&P 500 could trade toward 6,300 by early April before our favorable fundamental outlook can take hold again," he added.

Beyond the short-term downside, Wilson said he saw several catalysts that would help push the market higher, supporting the bank's long-running bull thesis. He pointed to broad earnings growth in the market, as well as the fact that the US is more insulated from oil-price shocks compared to Asia and Europe.

Markets should also get a boost from the fiscal policies in the One Big Beautiful Bill Act, which could offset the impact of higher oil prices in the short run, Wilson added.

"Remember, market lows happen faster than tops, so be ready to add risk in anticipation of the bull market resuming later this year," Wilson said.