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The current rally in stocks will lure investors into thinking the bear market is over, bu it’s still possible for the S&P 500 to slump another 26% next year, according to Morgan Stanley's chief US equities strategist Mike Wilson.

The top portfolio strategist, according to Institutional Investor, spoke a day after Federal Reserve Chairman Jerome Powell signaled rate hikes would slow as soon as this month.

"Powell's commentary is right in line with what we've been saying, which is that they're going to pause probably in January and the market is getting in front of that. This is a classic Fed pause stock market rally," Wilson said in an interview with Bloomberg TV on Thursday. 

The Fed chief's remarks led stocks to skyrocket on Wednesday, as tech and other growth stocks have been crashed by Fed rate hikes all year.

If the predictions are accurate, Nasdaq and other heavily-shorted stocks could lead the new market rally, but investors are still in a bear market, even if gains last through December, Wilson warned.

"This rally will go further and will probably drag people back into thinking that this bear market is over," he added.

Stocks recovered after the October inflation report clocked in below expectations, sparking hopes the Fed will move from its hawkish stance up, allowing equities to breathe after.

But Wilson has argued that corporate earnings are still 20% too high and will fall next year, causing stocks to bottom in the first half of 2023.

Bank of America also said a US recession could wreak havoc on the stock market and send stocks 24% lower next year, and JPMorgan warned that the S&P 500 could soon retest a low of 3,577, a 12% decline from current levels.