What happened

Shares of Upstart (UPST 5.11%) were falling today after Morgan Stanley reiterated a sell-equivalent rating and urged investors to sell the stock after its recent rally.

As a result, Upstart shares were down 13% as of 2:10 p.m. ET.

So what

Shares of Upstart, a consumer lender that uses artificial intelligence to determine creditworthiness, are up about 300% over the last three months on a combination of an extended short squeeze, an improving macro environment, excitement around artificial intelligence, and guidance indicating the beginning of a recovery in its first-quarter earnings report.

However, Morgan Stanley is calling time on that rally with Upstart's Q2 earnings report due tomorrow, as the investment bank said that the credit sector is underperforming relative to the rest of the stock market and that delinquencies have remained high. Consequently, Morgan Stanley advised investors to fade "what appears to be a low-quality rally" in Upstart, and it maintained an underweight rating and $13 price target, implying a downside of close to 80%.

Now what

Upstart's peers LendingClub (LC 2.74%) and LendingTree (TREE 2.24%) both reported disappointing earnings results last month and indicated that the market for consumer loans continues to shrink as interest rates rise and banking partners pull back on demand. 

Upstart certainly isn't immune from those trends, but the company's guidance had indicated that it expected a rebound from Q1, calling for $135 million in revenue for Q2, up from $103 million in Q1. While that's still down sharply from the previous year, it shows that the worst of the macro headwinds may have passed for Upstart.

Investors will be eager to see the Q2 numbers and hear management's commentary, as the stock is likely to be highly volatile following the report tomorrow afternoon. Wall Street expects a per-share loss of $0.07 and revenue of $135.3 million.