“Investor sentiment and positioning has turned 180 degrees,” Morgan Stanley’s Mike Wilson said Tuesday, as US equities looked for direction coming off a fifth weekly gain.

Not to spoil the suspense, but Wilson still isn’t buying the rally. The mood among retail and institutional investors is now “outright bullish,” he declared, noting that sentiment readings for both individuals and professionals are at two-year highs, and sit “in the top quintile of the past several decades.”

On that score, at least, consensus is right far more often than not. “The collective intelligence of the market knows best,” Wilson remarked.

This time could be different, though. It all depends on whether growth holds up (or picks up) in the back half of the year. Wilson doubts it will, and if the economy and earnings disappoint, “many investors may be in for a rude awakening given the very big reach for risk we are seeing.”

That “reach for risk” is proxied by Morgan Stanley’s “risk demand” index, which has reached “extreme” levels, as illustrated above.

There are several pillars to Wilson’s bear case, but the most important is his view that the worst of the earnings recession in the US isn’t behind us. “The market and most investors believe we have reached the rate of change lows [for earnings growth] and will see accelerating growth from here,” he wrote Tuesday. “We respectfully disagree with that conclusion based on the same models that helped us make the out-of-consensus earnings recession call a year ago.”

It’s important to note (and I emphasize this every week) that Wilson was correct. Corporate America is in an earnings recession. The negative operating leverage thesis did play out. But, it’s been a shallow contraction, profitability is still very healthy and equities have re-rated. Bottom line: US stocks are up handily this year, and that’s wrong-footed some of Wall Street’s top-ranked, top-down strategists.

Wilson readily acknowledged as much. “Given we have been so wrong about the S&P 500 this year, we have been trying to decide if our earnings model may be misleading us,” he said. For now, he thinks it’s best to trust the model. After all, actual, reported earnings have moved in lockstep with it (the model) even in the presence of distortions from so-called “Greedflation.”

“We don’t think this is the time to abandon the model and if it’s right, then price will ultimately follow,” Wilson said, reiterating his conviction.

As for the A.I. frenzy, Wilson doesn’t doubt the technology’s potential. Not at all. What he doubts is the idea that it can short circuit a profit downturn that’s already unfolding.

“We believe in the A.I. theme too and believe it will be a big component in the next boom,” Wilson wrote. “We just don’t think it will prevent the deceleration that is already in motion for this year [and] instead view A.I. as mostly a cost in 2023 that will pressure margins further as top-lines disappoint.”