Fundstrat’s Tom Lee remains bullish despite inflation

Fundstrat’s Tom Lee remains bullish despite inflation

  • Falling stock prices, rising interest rates and steady inflation are not enough to change Fundstrat’s belief in the market.
  • Fundstrat’s Tom Lee outlined why he expects another stock market rally at the end of the year in a note on Friday.
  • “The Fed could do much less tightening as the market does the Fed’s work,” he argued.

Inventories are sinking, yields are soaring and inflation is flat. However, Fundstrat’s Tom Lee remains firm in his view that the stock market will soar at the end of the year.

In a note on Friday, Lee stuck to his thesis that the S&P 500 could rise to Fundstrat’s year-end target of 5,100, representing a potential upside of 37% from current levels.

This is despite the Fed’s FOMC meeting on Wednesday, which led to another aggressive rate hike of 75 basis points, on top of Fed Chairman Jerome Powell’s more hawkish remarks. That commentary led investors to expect even more rate hikes through 2023, with a terminal funding rate of 4.6%.

In response to the most recent Fed meeting, short-term bond yields jumped to their highest level since 2007, while stocks have fallen about 4%.

Lee’s bullish confidence in the stock market stems from the idea that future indicators show that inflation is indeed starting to decline and that will lead to a less hawkish Federal Reserve in 2023, contrary to Powell’s most recent comments.

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

If inflation is indeed “falling like a rock,” then “the Fed could do much less tightening as the market does [the] Fed job,” he added.

“Take a step back. If inflation through December 2023 is 2.8% and Fed funds through December 2023 are 4.6%, that could be seen by investors as constructive. After all, monetary policy until then is already restrictive and there would be room for them to lower interest rates,” Lee said.

In addition to a less hawkish Fed than the market currently expects, a resilient corporate earnings base could also surprise investors going forward, the note said.

“U.S. companies remain impressively resilient, weathering the global pandemic shutdown with cost discipline, and U.S. companies are also impressively weathering the burst of inflation,” Lee said.

The resilience of both the U.S. business and consumer was on full display in Costco’s fourth-quarter earnings results, which revealed comparable same-store sales growth of nearly 14%, well above the analyst estimate of 12.5%.

Finally, investor sentiment “is down and worse than the Great Financial Crisis by some measures,” Lee said. This tends to be a bullish contrarian signal when investment sentiment reaches extremes. The AAII’s latest investor sentiment reading showed bullish respondents falling to levels not seen since 2009.

“There are green shoots,” Lee said.

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