Although the investment bank didn’t join the growing chorus of recession predictions from Wall Street on Monday, analysts led by Michael J. Wilson said they expect to see the S&P 500 falling sharply from its current levels.

“With inflation so high and earnings growth slowing rapidly, stocks no longer provide the inflation hedge many investors are counting on,” the analysts wrote in a note on Monday. 

Morgan Stanley’s minimum downside prediction would lead to a roughly 8% drop in the S&P 500 from Friday’s closing price, while their worst-case scenario implies a more than 16% fall. 

The bearish call follows the investment bank’s correct prediction last week that stocks would fall into bear market territory as earnings guidance proves to be weaker than anticipated.

Sure enough, the S&P 500 sank roughly 4% on the week in its second correction—a drop of 10% from a recent peak—this year as big tech names hurt results.

“The catalyst for the sharp and broad move lower last week was the growing evidence that growth is slowing faster than most investors believe,” the Morgan Stanley team said.

With inflation at a four-decade high, the S&P 500’s real earnings yield—the inverse of its price-to-earnings ratio, adjusted for inflation—has fallen to its lowest level since the 1950s. When that happens, it tends to lead stocks lower, Goldman said.

In a separate note, Bank of America analysts, led by Savita Subramanian, pointed out that first-quarter EPS for S&P 500 companies is on pace to post a solid 4% beat compared to analysts’ estimates, but admitted that doesn’t tell the whole story. 

Earnings guidance, revisions, and corporate sentiment have all moved to their lowest levels since the beginning of the pandemic in 2020, the bank said.

“In short, we believe earnings estimates remain too high over the next 12 months even though 1Q results have been better than expected,” Morgan Stanley analysts wrote. “The issue is that the quality of earnings is deteriorating, and the commentary from management teams is getting incrementally cautious about the future path of growth.”

Morgan Stanley analysts also pointed to falling margin debt—the amount of money traders have borrowed to buy stock—as evidence that the “buy the dip” mentality from retail investors is fading, which could make stocks less resilient moving forward. FINRA margin debt sank from highs near $1 trillion at the end of last year to just $799 billion in March.