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Todd Campbell

Analyst Tom Lee Forecast This Year's Stock Rally -- Here's What He Thinks Now

Fundstrat's Tom Lee has been tracking the stock market professionally for thirty years. Like any Wall Street analyst, he's made predictions that didn't pan out. However, this year wasn't one of them. 

Coming into 2023, Lee was about as bullish as it gets. His analysis of inflation's drivers led him to conclude that inflation would fall faster than pessimists believed, setting up stocks for a significant move higher. 

While some, including Morgan Stanley's Mike Wilson, doubled down on bearish forecasts last December, Lee told investors to expect the S&P 500 to climb 20% to 4,750. The benchmark index was 4,554 on July 24, up 19% year to date.

Of course, this year's stock market rally hasn't happened in a straight line. There have been plenty of pauses and pullbacks. Even so, Lee has stuck to his bullish theme. For example, he told investors in March that they were poised to head higher again after stocks sold off in February. Sure enough, the S&P 500 has climbed meaningfully since then.

What Fundstrat's Tom Lee Thinks Happens to Stocks Now

The S&P 500 is entering a seasonally more challenging time of year. Stocks often post relatively lackluster returns in summer as the vacation season takes a toll on volume, making stocks more susceptible to sellers. 

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Yet Lee is unfazed. Stocks could digest some gains, but Lee tells his clients, including hedge funds, that a pullback could be shallow and short-lived.

"The chorus for those calling for a correction to start is growing, and the recent gains by Defensives like Utilities, Healthcare, and Staples only add to that view," wrote Lee. "But fundamental drivers tilt us towards the idea that any pullback will be shallow. That is, there are some key upcoming macro events that we believe could lead to lower interest rates and, thus, are supportive of stocks."

The events Lee refers to are the Fed's potential last interest rate hike on July 26, June PCE inflation data on July 27, and July CPI inflation numbers on August 10. 

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If inflation continues to moderate, the odds the Fed will stay on the sidelines improve. That would help the economy and, ultimately, corporate earnings, which have been declining. For instance, S&P 500 companies are expected to report second-quarter earnings down 7% from one year ago. 

Recently, Lee pointed out that earnings will likely be lower because falling oil and gas prices have taken a toll on energy stocks. Remove those stocks from the equation, and S&P 500 earnings could tilt positive.

If so, that could help inspire optimism among investors, prompting them to buy weakness and limit the damage caused by a sell-off. As a result, while Lee doesn't dispute the potential for a pullback, he remains bullish overall. 

What's his S&P 500 target now? Last month, Lee increased his S&P 500 target above 4,800.

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