Fundstrat’s Tom Lee remains optimistic despite inflation

  • Falling stock prices, rising interest rates and sticky inflation are not enough to change Fundstrat’s belief in the market.
  • Tom Lee of Fundstrat outlined in a Friday note why he still expects a stock market rally at the end of the year.
  • “The Fed could tighten much less because the market is doing the Fed’s job,” he argued.

Stocks plummet, yields rise and inflation remains sticky. Still, Fundstrat’s Tom Lee remains adamant that the stock market will rise towards the end of the year.

In a note dated Friday, Lee insisted that the S&P 500 could rise to Fundstrat’s target of 5,100 by the end of the year, representing a potential increase of 37% from current levels.

That’s despite the Fed’s FOMC meeting on Wednesday, which led to another aggressive 75 basis point rate hike, alongside more aggressive comments from Fed Chair Jerome Powell. That comment has led investors to expect even more rate hikes in 2023, with a final rate of 4.6%.

In response to the Fed’s most recent meeting, short-term government bond yields rose to their highest level since 2007, while equities fell about 4%.

Lee’s bullish stock confidence stems from the idea that forward-looking indicators show that inflation is indeed beginning to cool, leading to a less aggressive Federal Reserve in 2023, contrary to Powell’s most recent comments.

“Our ongoing analysis shows that leading indicators point to disinflation/deflation,” Lee said, pointing to a continued decline in the Manheim Used Vehicle Index, recent comments from FedEx and Costco management teams about falling prices and lower oil prices.

If inflation does indeed “fall like a rock”, the “Fed could tighten much less like the market is doing” [the] Fed’s job,” he added.

“Take a step back. If inflation is 2.8% in December 2023 and the Fed funds 4.6% by December 2023, then this could be considered constructive by investors. After all, monetary policy is already in place by then. restrictive and there would be room to lower rates,” Lee said.

Aside from a less aggressive Fed than the market currently expects, a resilient corporate earnings base could also surprise investors going forward, the note said.

“US companies remain impressively resilient and weather the pandemic global shutdown with cost discipline, and US companies are also impressively weathering the rise in inflation,” Lee said.

The resilience of both businesses and US consumers was fully reflected in Costco’s fourth quarter earnings results, which showed comparable store sales growth of nearly 14%, well above analysts’ estimate of 12.5%.

Finally, investor sentiment “is rock bottom by some measures and worse than the Great Financial Crisis,” Lee said. That’s usually a bullish contrarian signal when investor sentiment reaches extremes. The most recent AAII reading of investor sentiment showed that bullish respondents fell to levels not seen since 2009.

“There are greenshoots,” Lee said.

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