The stock market probably hasn’t hit bottom, but it’s getting near fair value, says a prominent Wall Street analyst who was among the first to call last year’s fourth-quarter selloff. But beware the market’s tendency to overshoot, which could leave scope for further downside.

“The S&P 500 is now close to our view of 2,750 ‘fair value’ in 2019, but we are aware that overshoots are the norm in this market,” said Barry Bannister, head of institutional equity strategy at Stifel Nicolaus, in a note.

The call is unlikely to be much comfort to stock market bulls, with Bannister arguing that the market will continue to struggle over the longer term in light of what he views as overly tight monetary policy by the Federal Reserve. Indeed, this month’s market action indicated that the “sell in May and go away” rule returned in 2019 after a five-year absence, he said.

The 2,750 fair value call assumes a price-to-earnings ratio of 17.5 and reflects expectations Wall Street analysts will cut 2019 S&P 500 earnings per share forecast to $156 from its current $166. That’s likely to come before a Fed rate that’s likely in the second half of 2019, Bannister said.

Bannister, citing concerns over the Fed’s steady stream of rate rises, warned last September that stocks were entering the “danger zone” and that a bear market — typically defined as a 20% fall from a peak — was likely within a year. Stocks sold off sharply in the fourth quarter as Fed-inspired fears of an economic slowdown took hold, with the S&P 500 SPX, -0.01%  ending just shy of 20% below its all-time high on Christmas Eve before mounting a bounceback that took the large-cap index to a new all-time closing high in April. The S&P gave up early gains to edge 0.1% lower in Thursday afternoon activity to trade near 2,781.

Stocks have retreated substantially in May, however. The S&P 500 and the Dow Jones Industrial Average DJIA, -0.09%  have both logged monthly declines of more than 5% amid an escalating U.S.-China trade fight and partly related worries over an economic slowdown, potentially signaled by a continued fall in Treasury yields and an inversion of the yield curve.

Stifel expects a sharp slowdown in nominal U.S. gross domestic product that will pressure S&P 500 cyclical stocks relative to defensive names. In the near term, the S&P 500 might trade slightly below the 2,800 average seen in May through September of last year, Bannister said, citing a weak global manufacturing purchasing managers index reading and doubts China is set to follow up announced stimulus measures with significant, additional action.

While the Fed in January moved to halt its policy of rate increases and has subsequently stood pat, Bannister contends that monetary policy is still tighter than the Fed realizes and that the S&P 500 is likely to remain pressured until the central bank moves to cut the fed-funds rate twice, or 50 basis points, to bring it back below what Stifel sees as the “neutral rate.” Economists view the neutral rate as the level at which official interest rates neither boost nor slow the economy.

The fed-funds rate relative to the neutral rate is at a level versus trend that “risks a recession and/or bear market,” wrote Bannister.