Wall Street’s most steadfast bull warns: If oil prices and the bond market worsen, the S&P 500 may first drop to 7,100 points.

According to Jinse Finance APP, Morgan Stanley strategists have indicated that the US stock market is vulnerable to further rises in energy prices and increased volatility in the bond market. They believe that under such circumstances, the S&P 500 Index could drop by as much as 7%.

The team led by Michael Wilson stated that although strong corporate earnings have helped support equity prices against higher bond yields so far, the S&P 500’s valuation has declined to its lowest level since March over the past four months.

Wilson wrote in a report, "If recent further tightening of financial conditions and/or a sharp rise in energy prices cause valuations to deteriorate further, we believe the S&P 500 Index could fall as low as 7100 points before the bull market resumes by year end."

This level represents a 7% drop from the index’s closing price last Friday.

Wilson also predicted that volatility will rise approaching the midterm elections in November, but ultimately believes solid corporate earnings prospects will support a year-end rebound toward his 8000-point target, which equates to an almost 5% gain from current levels.

The S&P 500 Index has remained volatile since reaching record highs in mid-August, as the market worries about the inflation outlook while the 10-year US Treasury yield hovers near 5%. WTI prices have fallen back below $100 per barrel but remain 43% above the July low. Last week, the Federal Reserve enacted its first rate hike in three years.

Nonetheless, the central bank’s resolve to fight inflation continues to keep investors bullish. The benchmark stock index is currently only about 2% below its peak, buoyed by one of the best earnings seasons on record for the second quarter.

Market strategists, including those at JPMorgan and Goldman Sachs, have also stated that healthy earnings should continue to support equities, although the Bank of America team warned that with profit growth slowing, investor positioning is still overly bullish.

Morgan Stanley's Wilson is one of the strongest bulls on US stocks this year. He reiterated his recommendation for high-quality large-cap stocks, and noted that momentum is building in service-oriented, asset-light sectors.