Investors should buy stocks ahead of Nvidia’s earnings report and Fed Chair Jerome Powell’s speech at Jackson Hole.
The bold call comes from Fundstrat’s Tom Lee, who offered four reasons why he expects stocks to rise soon.
“While rates could be pushing higher, equities are showing early signs of diverging from higher rates.”
It’s been a tough few weeks for the stock market, with both the S&P 500 and Nasdaq 100 down about 5% in August, but Fundstrat’s Tom Lee sees a buying opportunity.
In a note to clients on Wednesday, Lee said today is the day to add risk to portfolios and buy stocks ahead of two big market-moving events: Nvidia’s earnings report after the market close on Wednesday, and Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Symposium Friday morning.
The bold call comes amid a surge in interest rates, in which the 10-year US Treasury yield surged 50 basis points over the past few weeks to levels not seen since 2007.
“Despite this rise in rates, we believe probabilities have shifted to favor stocks being higher in the short term. That is, we would be buyers of equities starting Wednesday, even if we are only in ‘close proximity’ to a low,” Lee said.
These are the four reasons why now is the time to buy stocks, right before two big market-shaking events, according to Fundstrat.
1. Stocks typically do well after Jackson Hole.
Lee analyzed market performance in the week after Jackson Hole speeches, and found that stocks typically move higher, not lower.
“Our analysis suggests there is a greater than 80% [chance] equities rally post-Friday,” he said.
Looking at data since 2003, Lee found seven instances in which the S&P 500 was down in the two weeks prior to the Fed speech, similar to what the current stock market looks like.
In six of those seven instances, stocks gained in the week after Jackson Hole by 0.5%-5%. One exception was last year, when Powell was especially hawkish.
“The context is different in 2023, as inflation is not only on a glide path lower, but the surge in 10-year yields threatens a potentially greater tightening of financial conditions and thus, we see probabilities favoring language addressing this surge in yields,” Lee said.
2. New data could put pressure on inflation.
New data show pay for new hires declined versus a year ago. Meanwhile, auto-loan delinquencies are up, likely putting pressure on car prices.
“We previously wrote how used car prices could fall another 30% from here. All of this argues for future inflation to be softer and for Fed path to turn dovish sooner,” he said.
3. Stocks are diverging from rates.
When interest rates surged earlier this week to their highest level in more than a decade, technology stocks actually moved higher, not lower.
“This is a somewhat important development, if this is due to stocks sensing rates are about to roll over. Our view is a calculated bet that stocks are rising, despite higher rates, because the stock market is sensing this turn,” Lee said. “We are saying the last push higher in rates will not proportionately hit stocks.”
4. Upcoming data could ease inflation concerns.
A lot of economic data is due next week, including Case-Shiller Home prices, job openings, and second-quarter GDP revisions. And Lee is bullish that it will paint a clearer picture that inflation is indeed moving lower, which means there should be less upside pressure on interest rates.
“Our view is this will support the picture of a glide path to lower inflation and a softening labor market. Given the hawkish shift in investor expectations, I think this would further support a rise in equities,” Lee said. “Our constructive stance on buying ‘risk’ on Wednesday is that the bull market is intact.”
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