Stocks are in the middle of a 'pivot rally' that still has room to run, according to one of Wall Street's biggest bears

• Morgan Stanley's Mike Wilson says stocks' latest rally looks a lot like what played out in 2019.
• At that time, the stock market was riding high on easing Fed policy, and the dynamic is the same in the latest rally.

Stocks are partying like its 2019 thanks to the Fed, and they could still run higher, according to one of Wall Street's most prominent bears.

Morgan Stanley's Mike Wilson told clients Monday that the market is riding the momentum created by the outlook for easier central bank policy on the horizon, and the expectation that last week's 25 basis-point rate hikes marked the end of the tightening cycle.

"The data we have today suggests to us that we are in a policy-driven, late-cycle rally," Wilson wrote.

In 2019, the S&P 500 saw one of its best years of the decade with a 29% return. The key index is currently up 20% in 2023, nearly mirroring the performance at the same time four years ago. At the time, the central bank definitively paused and then cut rates before its balance sheet expanded by the end of the year.

Currently, stocks are climbing against a still-supportive global liquidity backdrop, the strategist said, and investors are optimistic that falling inflation will justify loosening monetary policy. On Friday, the Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, saw its slowest increase in two years.

Like 2019, this year stocks have been buoyed not by earnings but multiples, in Wilson's view, and that has spurred gains for mega-cap tech and growth stocks.

"The 2019 analogy, in and of itself, suggests more index level upside from here," Wilson said. "Though we'd note that the Fed was already cutting rates for a good portion of 2019, and the market multiple is already close to 1 turn higher than where it peaked during that period."

Meanwhile, Wharton professor Jeremy Siegel believes stocks are heading toward new all-time highs. He pointed to a resilient economy and promising earnings as fuel for the rally.

"This is such a strong market," Siegel said in an interview with CNBC on Friday. "Lower inflation and stronger economy and good guidance and good profits, what's to stop this market now?"

Morgan Stanley has moderately pulled back on its bearish outlook for this year after the market's strong first-half rally, joining the likes of Goldman Sachs and Fed economists in lowering the odds they see for a recession to strike. Wilson, however, cautions that the rally doesn't mark the start of a new cyclical turn that will usher in a longer period of strong gains for stocks, at least not yet.

"While we're open-minded to this view eventually materializing, we'd like to see a broader swath of business cycle indicators reflect higher, breadth improve and front-end rates come down before adjusting our stance in this regard," Wilson said.