Last December, if you polled most Wall Street participants about what the future of the equities markets will be, the majority would have predicted a decline in 2023. Morgan Stanley’s senior US equity strategist, Mike Wilson, was one of the street’s most fervent bears.

He predicted equities would lose momentum in December and the S&P 500 would fall to between 3,000 and 3,200. Rather, the S&P 500 has gained around 18% so far this year.

“We were wrong,” Wilson wrote in a note to clients, according to Bloomberg. “2023 has been a story of higher valuations than we expected amid falling inflation and cost cutting.”

Investors’ optimism has been driven by a steady drop in inflation, a resilient jobs market and the near end of the Fed’s tightening cycle, which has fueled a massive rally in the technology space led by the artificial intelligence mania.

While admitting his mistake, Wilson remains “pessimistic on 2023 earnings,” Bloomberg wrote. “Inflation is now falling even faster than the consensus expects, especially the inflation received by companies. With price being the main factor that has held sales growth above zero for many companies this year, it would be a material headwind if that pricing power were to roll over.”

Wilson believes that declining inflation may force businesses to lose pricing power. If this occurs, earnings may decrease, exposing stocks to a further decline.

His target for the S&P 500 is 3,900 this year and 4,200 in June 2024.