- US stocks could see big upside through the end of the year as investors await the November CPI and the December FOMC meeting, according to Fundstrat.
- Fundstrat highlighted 7 reasons why stocks could surge, including the overly bearish sentiment among investors.
- “The consensus trade for 2023 is short equities. Think about that,” Fundstrat’s Tom Lee said.
Fundstrat’s Tom Lee isn’t letting up on his bullish view that the stock market could soar by the end of the year and beyond, according to a Monday note.
Ahead of the November Consumer Price Index report and December FOMC meeting this week, Lee highlighted seven reasons that could drive stock prices higher. Lee has highlighted the 4,500 level on the S&P 500 as a potential year-end target, which represents potential upside of 14% from current levels.
“As markets enter the final weeks of 2022, investors are doubting equities can rally into year-end, particularly after the November core PPI came in at 0.38% (vs Street +0.2%) given how hyper-sensitive markets are to incoming data,” Lee said. “But as we look into this critical week, we think probabilities favor stocks.”
These are the seven reasons why Lee is bullish on stocks and expects further upside over the next few weeks, according to the note.
1. “Inflation is falling like a rock.”
“The 3-month annualized post-November core PPI is now 2.69% — think about that. It was more than 11% in March 2022. So the +0.38% November PPI might be above Street, but the trend is obvious,” Lee said.
Now all eyes are on the release of this week’s November CPI report, and Lee expects a reading of 0.3%, which would represent a major break in trend, “as it would be two ‘soft’ CPIs consecutively,” Lee said.
2. “Equities have fallen in six of the last seven sessions.”
“This is approximately the ninth time in 2022 this has happened. This has been followed by strong bounces 10 days and 1 month later,” Lee said, with median returns of 3.1% and 4.9%, respectively.
3. “Russian war-inflation is dead.”
“Oil and wheat are now 21% and 13% below the pre-invasion prices (the prices before the parabolic surge) and the war is still ongoing. The inflation war is dead,” Lee said.
4. The Fed can insert dovish language into FOMC statement.
“The FOMC press conference doesn’t have to be entirely hawkish. In fact, there might be a ‘dovish’ modification in language,” Lee said. Since March 2022, the Fed has included a paragraph in the press conference that highlights Russia’s attack against Ukraine as “creating additional upward pressure on inflation.”
“Removal of this language, in our view, would also allude to a potential shift in the Fed view on inflationary drivers,” Lee said.
5. The Fed could abandon its long-term 2% inflation target.
“Economists are increasingly vocal about the notion the Fed will capitulate on the 2% inflation target. The FT op-ed by Olivier Blanchard, French Economist, argues a better target is 3% to 4% both from the perspective [of] managing policy rates and also for consumers and wage earners. This would be a tremendous shift and change the path of markets,” Lee said.
6. Everyone is bearish.
“The latest Goldman Sachs client survey shows of the 10 possible trades for 2023, the plurality of clients are ‘short S&P 500’ — yup, the consensus trade for 2023 is short equities. Think about that,” Lee said.
7. Credit isn’t falling apart.
“Credit has outperformed equities and as the regression below shows, the rally in high yield option-adjusted spreads point to S&P 500 at 4,200. This means the S&P 500 has upside without a further rally in credit. But we think credit can further rally if November CPI is soft,” Lee said.
