The likelihood of a fourth-quarter rally has “fallen considerably” over the past month, according to Morgan Stanley chief U.S. equity strategist Mike Wilson. Wilson has been forecasting the S & P 500 ending the year at 3,900, making him among the most bearish strategists on Wall Street according to CNBC’s Market Strategist Survey. While he noted in a Sunday note to clients that initial bullish sentiments waned in September — before picking up again this month on expectations of better third-quarter earnings and seasonal strength into the year-end — his lower estimate for the broad market index remains. “We think the S & P 500 price action into year-end is more likely to come down to where the average stock is trading rather than rallying to higher levels, because breadth typically leads price,” Wilson wrote. “Cautious factor leadership, falling earnings revisions and fading consumer and business confidence” this year have created a fundamental setup different from normal, Wilson added. He believes earnings expectations are too high for the fourth quarter and 2024, despite the stronger-than-expected economy. Wilson, who began his Morgan Stanley career as an investment banker in 1989, said that while the Federal Reserve could be done with rate hikes for now, the current level of fed funds are likely to stay “higher for longer.” Meanwhile, the lagging effects of rate hikes are still working their way through the economy, he added. “In our view, the strength in the headline labor data masks the headwinds faced by the average company and household that the Fed can’t address proactively. This is one reason why market breadth continues to exhibit notable weakness,” Wilson said. Poor earnings revision breadth “While some may interpret this as a bullish signal — i.e., oversold conditions — we believe it’s more a reflection of our view that we are still against a late cycle backdrop where earnings remain at risk for most companies. Further support for that view can be seen in earnings revision breadth, which is breaking sharply lower again into negative territory,” Wilson continued. Economic- and rate-sensitive sectors such as banks, real estate, semiconductors and consumer durables have significantly underperformed over the past three months. Conversely, several defensive sectors have begun to outperform alongside energy, which Wilson said supports his “late cycle” view and defensive growth strategy. “We think this performance backdrop reflects a market that is incrementally more concerned about growth than higher interest rates and valuations per se,” said the strategist.