• There's still more downside in US stocks despite the rally following Wednesday's Fed meeting, Morgan Stanley's Mike Wilson told CNBC. 
  • Stocks will struggle with 'no window' between the end of the Fed's rate hikes and a recession, he said. 
  • Wilson said the S&P 500 could fall to as low as 3,000 in a recession scenario. 

While stocks soared following the Federal Reserve's latest policy meeting, investors should know that more pain lies ahead for the US equity market as the world's largest economy looks set to shrink, Morgan Stanley's investment chief told CNBC. 

The "market always rallies once the Fed stops hiking until the recession begins. The problem with that … it's unlikely there's going to be much of a gap this time between the end of the Fed hiking campaign and the recession so there's no window in there like there normally is," Mike Wilson, Morgan Stanley's chief investment officer, said an a televised interview late Wednesday. "And so I think, ultimately, this will be a trap." 

Stocks on Wednesday jumped after Fed Chairman Jerome Powell said during a press conference that policy makers would be data-dependent in deciding what's next for its rate-hiking cycle. His comments suggested the central bank could pause rate increases if economic conditions significantly deteriorate through its next meeting in September. 

The Nasdaq Composite led Wednesday's rally with a 4.1% gain and the S&P 500 climbed by 2.6%. Policy makers issued a rate hike of 75 basis points, as expected. The fourth rate increase this year brought the benchmark interest rate to a range of 2.25% to 2.5%.

A preliminary second-quarter report on US gross domestic product released Thursday showed economic activity shrank by 0.9%. The Commerce Department's reading was wider than a Bloomberg consensus estimate of 0.5% contraction. The economy could be on the path of a technical recession, loosely defined as consecutive quarters of negative GDP growth. The National Bureau of Economic Research determines when recessions begin and end. 

"[Even] in the soft-landing scenarios as we've analyzed, we think that there's probably about $15 of earnings risk at the S&P level … and that would that would suggest that you still have downside to probably 3,500," Wilson said. 

The S&P 500 stood at 4,023.61 after Wednesday's session, off by nearly 16% on a year-to-date basis. 

The benchmark index could drop to as low as 3,000 in a recession outcome for the US economy. Wilson's year-end target for the S&P 500 is 3,900, among the most bearish views among Wall Street strategists. 

The bear market is "getting closer to the end," said Wilson. "But the problem is, it won't quit and we need to have that final move and I don't think the June low is the final move."

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