Gloomy outlook for S&P 500 may weigh it down to 3,400

After the torrid Friday bear-market dead-cat bounce, investors find themselves in a lull of a precipitous downward spiral, where views abound on where the market will head next.

He did recognize, however, a short-lived tradable rally, saying that "with valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally." Nonetheless, returning to his favorite bearish place, he adds that "after that, we remain confident that lower prices are still ahead." And "in S&P 500 terms, we think that level is close to 3,400, which is where both valuation and technical support lie."

Wilson derived his bearish view from the current low ERP level, which stands for equity risk premium, the additional return that's expected on stocks above the given risk-free rate. Since Treasuries are backed by the U.S. government, they're considered risk-free, and their yields are used as a proxy for a risk-free rate.

Wilson's own view is that multiples generally fall ahead of the bulk of earnings cuts, so part of the de-rating this year has been about the market anticipating these earnings cuts as much as higher rates. However, given the very modest equity risk premium (300bps) currently embedded in the P/E, Wilson doesn't think much of an earnings cut has been discounted.

Wilson asserted that the fair value for ERP is 340-350 bps, and his 3400 tactical target assumes the P/E troughs enough with major earnings cuts priced in.