The stock market is in for another bottom by year-end as investors are too focused on the Fed and too optimistic about earnings, Morgan Stanley's investment chief says

• The market is in for another bottom before the end of the year, Morgan Stanley's Mike Wilson said.
• Wilson thinks markets are too focused on the Fed and are not adequately pricing in earnings risk. 
• He sees the S&P 500 falling as much as 25% in there's a recession, or 15% if the Fed pulls off a soft landing.

The market is in for another bottom before the end of the year, Morgan Stanley's chief investment officer Mike Wilson said, warning that investors were still too focused on the Federal Reserve and too optimistic about corporate earnings.

All eyes were on Fed Chair Jerome Powell at Jackson Hole last week, but Wilson thinks the central bank's policy actions have already been priced into the market, and prices are now mostly dependent on risks to growth. 

"The Fed is relevant, I'm just saying that we've priced most of the Fed pain in the first half of the year," Wilson said in an interview with Bloomberg, referring to the S&P 500 finishing off its worst first half since 1970 this summer. "All the [price to earnings ratio] compression that we experienced was due to the Fed getting around on inflation risk."

He noted that the equity risk premium – a portion of the price to earnings ratio that measures market expectations of risks to growth – is actually below where it was at the beginning of the year. That's a sign market expectations are to0 optimistic, and investors aren't accurately assessing the risk to earnings in the last stretch of the year, Wilson said. 

"We think the earnings risk is now upon us. We're cutting numbers. And we think that the numbers are going to come further down over the next two quarters," he said, adding that earnings cuts and lowering optimism typically leads to a new bottom in the market. He expects that to hit between September and December, despite some prevailing optimism that stocks will rally from here on out.

He also noted that, while most stocks hit their intra-year low in June, that hasn't fully shown up in stock indices yet, meaning that the S&P 500 will likely edge lower throughout the rest of the year.

In the event the Fed pulls off a soft landing, Wilson sees the index hitting bottom at 3400, or 3000 if the economy spirals into a full recession. That would represent potential downside for the S&P 500 of 15%-25% from Wednesday's levels.