Fundstrat’s Tom Lee remains bullish despite inflation

  • Falling stock prices, rising interest rates, and constant inflation aren’t enough to change Fundstrat’s market sentiment.
  • Fundstrat’s Tom Lee explained why he still expects a year-end rally in the stock market in a note on Friday.
  • He argued that “the Fed can do a lot less tightening because the market is doing the Fed’s job.”

Stocks are going down, yields are going up, and inflation is still flat. However, Tom Lee of Fundstrat remains firm in his opinion that the stock market will go up 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 5100, which is a potential upside of 37% from current levels.

This is despite Wednesday’s Federal Open Market Committee meeting of the Federal Reserve, which raised interest rates by 75 basis points, as well as more hawkish comments from Fed Chair Jerome Powell. This comment prompted investors to expect further rate increases by 2023, with the final Fed Funds rate at 4.6%.

In response to the Federal Reserve’s recent meeting, short-term Treasury yields rose to their highest level since 2007, while stocks fell about 4%.

Lee’s bullish confidence in the stock market stems from the idea that forward-looking indicators show inflation has already begun to subside, and that this will lead to a less hawkish Fed in 2023, contrary to Powell’s recent comments.

“Our ongoing analysis shows that the leading indicators are pointing to declining inflation/deflation,” Lee said, referring to the ongoing decline in the Mannheim used car index, recent commentary from FedEx and Costco management teams about lower prices, and lower oil prices.

If inflation is in fact ‘falling like a rock’, then ‘the Fed can do much less tightening as the market does. [the] “The Fed worked.”

“Take a step back. If inflation by December 2023 is 2.8%, and the fed funds is 4.6% by December 2023, investors may view this as constructive to cut interest rates.”

Regardless of the Fed being less hawkish than the market currently expects, a flexible corporate earnings base could also surprise investors going forward, according to the note.

“US companies remain admirably resilient, withstand the global pandemic shutdown while adjusting costs, and US companies are admirably weathering rising inflation as well,” Lee said.

The resilience of both business and the US consumer was quite evident in Costco’s fourth-quarter earnings results, which revealed similar same-store sales growth of nearly 14%, well ahead of the analyst’s estimate of 12.5%.

Finally, Lee said investor sentiment is “rock bottom and worse than the major financial crisis by some measures.” This tends to be a contrarian bullish sign when investor sentiment is reaching its limits. The latest AAII investor sentiment reading showed bullish respondents dropping to levels not seen since 2009.

“There are green plants,” he told me.

Leave a Comment