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- The S&P 500 could retest its all-time high once the Federal Reserve signals it’ll ease up on its rate-hike campaign, according to Fundstrat’s Tom Lee.
- Lee expects the benchmark index to rally 24% to reach 4,800 points in 2023.
- The Fed will no longer “crush the market” as inflation starts to fall, he told CNBC.
US stocks will surge back toward record highs in 2023 once the Federal Reserve signals that it’ll ease up on its monetary-tightening campaign, according to Fundstrat Global Advisors co-founder Tom Lee.
Lee said in a recent interview that he expects the S&P 500 to steadily climb 24% from its current level to hit 4,800 points this year – which would mean the benchmark index retesting the all-time high it reached in January 2022.
The Fed’s interest-rate increases weighed on stocks last year, with the S&P 500 plunging 19.4% as higher borrowing costs ate into companies’ future cash flows. The US central bank has lifted rates aggressively in a bid to curb inflation, bringing its policy benchmark to between 4.25% and 4.5% from nearly zero in March.
Lee said that last year’s market losses were in line with the average drawdowns suffered from a peak to a market bottom – suggesting that investors have already fully priced in the Fed’s rate hikes.
“For those who think the Fed’s going to crush the market, one thing to keep in mind is that historically that from peak to max drawdowns, when the Fed starts a hike cycle and then pauses, the average drawdown is 18%,” he told CNBC’s “Squawk on the Street” Friday. “We’ve already fallen 20%, so we’ve already discounted a Fed tightening cycle.”
Latest economic data has shown the first signs that the central bank’s tightening campaign started to rein in price pressures toward the end of last year.
The Personal Consumption Expenditure index, which is the institution’s preferred inflation gauge, rose 5.5% in November – its lowest gain since October 2021.
Stocks could start to rally as early as next month if the Fed signals it’ll ease up on its tightening campaign when the first Federal Open Market Committee meeting of 2023 ends on February 1, according to Lee.
“That’s where I think inflation becomes the big pivot,” he said.
“The February FOMC is really the time where the Fed could true up and actually it looks like we’re in a dovish trajectory,” Lee added. “I think that’d be a huge catalyst for markets.”
Top strategists at both Bank of America and Morgan Stanley have warned that the S&P 500 could fall another 22% to 3,000 points in the next three months as the looming threat of a recession leads to companies slashing their earnings targets.
But Lee is more bullish. He said that markets may have already priced in earnings downgrades, with investors already anticipating a rebound next year.
“That’s definitely the battle that’s shaping up,” Lee said.
“On the one hand, people who pick stocks focus on the earnings decline,” he added. “If 2023 is a year where earnings are declining but they rebound in 2024, markets begin to look through that.”
“On average, stocks bottom 12 months before earnings estimates bottom, so one of the things we have to wonder is if this is an extended earnings contraction that isn’t already discounted by a 20% decline.”