The odds of a fourth-quarter rally for the S & P 500 are coming down as higher rates and slower growth pressure equities, according to Morgan Stanley’s Mike Wilson. Only 39% of the stocks in the broad market index are trading above their 200-day moving average, creating a historically narrow rally, the bank’s chief U.S. equity strategist said. Mega-cap stocks have dominated the outperformance, but even this group is seeing fading momentum and narrowing in leadership, the strategist said. “While attention is squarely on the S & P 500’s technical set-up between the 50- and 200-day moving averages, the average stock has already broken down technically,” Wilson wrote in a Monday note. Stocks have been volatile in recent weeks as traders weigh geopolitical risks while managing expectations for higher Federal Reserve rates for longer. The S & P 500 approached its 200-day moving average, around 4,224, earlier this month. On Monday, it traded close to its 50-day average of 4,402. .SPX YTD bar SPX in 2023 Wilson now forecasts the S & P 500 to fall to 3,900 by the end of 2023. The index was trading above 4,300 as of Monday morning. This forecast makes him among the most bearish strategists on Wall Street. According to the CNBC Market Strategist Survey , the average 2023 target for the S & P 500 is at 4,392, with the median target even higher at 4,500. Sean Simonds of UBS is the only other top strategist who forecasts the S & P 500 pulling back to 3,900. Meanwhile, Oppenheimer’s John Stoltzfus estimates the index rallying to 4,900. Despite his waning confidence levels, Wilson noted the majority of the investors he has spoken to still believe a fourth-quarter rally is more likely than not. He said the equity rally in the beginning of the previous trading week was simply a “flight to safety bid” that initially pushed Treasury yields lower. “While the mixed technical signals persist at the index level, when we look beneath the surface, we see a clearer breakdown in the average stock,” Wilson said. He reiterated his recommendation for defensive growth and late-cycle cyclicals amid the current late-cycle backdrop and macro risks. Bottom line The majority of the sectors are exhibiting weakening performance breadth, Wilson said. He highlighted utilities as the only sector showing “any recent surge in bread to the upside.” Meanwhile, the communications services and tech sectors are showing the most notable equal vs. cap weight underperformance, as both of these areas are seeing the largest-weight companies drive up strong cap-weighted performance this year. “The bottom line [is], the breakdown in various breadth measures, cautious factor leadership, the recent decline in earnings revisions and fading consumer confidence reduces the odds of a 4Q rally,” said the strategist. — CNBC’s Michael Bloom contributed to this report.