Stocks broke their longest losing streak since 2001 last week — but investors shouldn't get comfortable as the bear market rally is likely to fade, Morgan Stanley says

• The S&P 500 last week broke its longest losing weekly losing run since 2001.
• But the market's bear-market rally isn't likely to stick around for long, Morgan Stanley said Tuesday.

US stocks last week managed to snap a long losing streak, but the move higher merely marked a bear-market rally that's unsustainable until economic growth takes root, according to Morgan Stanley.

The S&P 500 jumped 6.2% and broke seven weeks of losses, the longest losing streak since 2001. The broad market index dipped into a bear market during May but had edged closer to turning positive for the month. The advance was fueled largely by a surge in consumer discretionary stocks after putting in the worst performance among the index's 11 groups so far this year by declining about 25%.

"[We] were due for a rally in the sector, but at the end of the day, we think it's nothing more than a bear market rally that will eventually fade," Mike Wilson, Morgan Stanley's chief US equity strategist, said in a research note published Tuesday.

"Bottom line, our base case remains that last week's strength will prove to be another bear market rally in the end."

Slowing growth is the key fundamental call the investment bank is focused on, alongside its view that earnings estimates are too high.

"Some of this is due to the payback in demand that transpired during the lockdowns while the other risk is related to profitability and the negative operating leverage many companies are now facing as cost inflation is rising faster than end market pricing," he said.

The bank is not assuming the US economy will fall into a recession, which would worsen the market's downside. Morgan Stanley noted regional PMIs have missed expectations and that it's watching for the ISM Manufacturing Index report that's due on Wednesday. The ISM Services report is due on Friday.

The probability of Morgan Stanley's bull case target of 4,450 12 months out is looking less likely than when it was published three weeks ago, said Wilson.

"One event that could increase those odds is a meaningful and lasting cease-fire between Ukraine and Russia," he wrote. "If such a cease-fire were to happen and could be sustained, it would relieve a lot of pressure on global growth and commodity prices, thereby improving the outlook for equities."