Wall Street's most steadfast bull issues a warning: if oil prices and the bond market deteriorate further, the S&P 500 could first fall to 7,100 points.

Morgan Stanley strategists said U.S. stocks are vulnerable to further increases in energy prices and heightened bond market volatility, and they believe that under such a scenario, the S&P 500 could fall by as much as 7%. The team led by Michael Wilson said that although strong corporate earnings have so far helped share prices withstand higher bond yields, the S&P 500's valuation has fallen over the past four months to its lowest level since March. Wilson wrote in a report, "If further tightening in financial conditions in the near term and/or a sharp rise in energy prices worsens the valuation pullback, we think the S&P 500 could fall to as low as 7,100 points before the bull market restarts before the end of the year." That level would imply a 7% decline from the index's close last Friday. Wilson also expects volatility to rise around the November midterm elections, but ultimately believes the earnings outlook is solid and will drive a year-end rally toward his 8,000-point target. That equates to a further gain of nearly 5% from current levels. The S&P 500 has been fluctuating since hitting a record high in mid-August, driven by concerns over the inflation outlook, while the 10-year U.S. Treasury yield hovers near 5%. WTI prices have fallen back below $100 per barrel, but are still 43% above their July low. The Federal Reserve raised interest rates last week for the first time in three years. Even so, the central bank's determination to fight inflation has kept investors bullish. The benchmark index is currently only about 2% below its peak, with share prices supported by one of the best earnings seasons on record in the second quarter. Market strategists including those at JPMorgan and Goldman Sachs also said healthy earnings should continue to benefit stocks, though the team at Bank of America warned that as profit growth slows, investor positioning remains too bullish. Morgan Stanley's Wilson is one of the most steadfast bulls on U.S. stocks this year. He reiterated his recommendation for large-cap high-quality stocks and said momentum is building in service-oriented, asset-light industries.