Stocks should see a 20% rise through 2023 if they can break through three hurdles, said Tom Lee of Fundstrat.
Lee pointed to signs of falling inflation and improving market breadth that support his bullish case.
He has been arguing for months that a new bull market is emerging in stocks.
According to Fundstrat’s head of research, Tom Lee, stocks could rise sharply through 2023, if the market manages to break through three main hurdles.
“As we enter the second week of June, our confidence that [the] The S&P 500 will gain >20% in 2023 rose. Last week’s decisive upside break helps, as do signs that inflationary pressures are easing,” he said in a note on Monday, pointing to the pullback in wage growth in the jobs report. may.
Wages continued a modest slowdown last month, easing to a 4.3% annual increase from the 4.4% annual increase seen in April. This is a sign that inflationary pressures may be easing in the economy, as higher wages may also influence prices upwards.
Easing inflationary pressures could signal a rise in stocks, Lee said, as it would allow the Fed to suspend or recall interest rate hikes. Fed officials have raised rates aggressively over the past year to fight inflation, which has weighed heavily on stocks in 2022.
He pointed to three key stock indicators that could flash next month and cement the S&P 500’s trajectory for the rest of the year:
1. The May Consumer Price Index Report
May’s inflation data will be key in determining the trajectory of stocks, Lee said. If core inflation is below a monthly increase of 0.4% or below a yearly increase of 5.5%, this will increase the chances that the Fed will suspend its rate hikes, which should spur a rally in equities.
The May Consumer Price Index report is due out on June 13. But markets have already significantly lowered their inflation expectations, with the five-year average inflation estimate five years ahead falling to 2.25% last week, according to Federal Reserve data.
2. The AI-driven rally for tech stocks
Tech stocks have soared in 2023 as companies take advantage of the AI hype and commit to implementing more artificial intelligence technologies in their businesses. There’s a chance the Fed won’t tolerate that enthusiasm, Lee said, given some tech giants, like Tesla, have soared nearly 100% year-to-date.
But AI could actually dampen inflationary pressures because increasing labor productivity will suppress long-term wage inflation, Lee added. This suggests that the Fed will not tighten financial conditions to combat the tech rally, which means an upside for the market as a whole and for tech stocks in particular.
3. Increase Market Scope
The percentage of winning stocks in the S&P 500 rose significantly, with eight out of 11 sectors trading above their 20-day moving average. Six of these sectors have a 20-day moving average above the 200-day moving average, another sign that a positive trend in the market is emerging.
Lee, for his part, was bullish on stocks for most of last year’s bear market and falsely predicted the S&P 500 would hit new highs in 2022, when stocks actually posted a decline of 20%.
He also called the start of a new bull market in March this year and predicted that the S&P 500 would rise 24% in 2023 as the Fed backed off from tightening, implying that the benchmark would retest a historic high of around 4,800. .
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