Cindy Ord
Tom Lee, managing partner at Fundstrat Global Advisors, made a bullish call on the market with a 5,700-point forecast for the benchmark S&P 500 (SP500), despite acknowledging that the latest consumer inflation report had “confused” the storytelling.
Lee did remarks during an appearance on CNBC’s “Closing Bell” segment on Friday.
March headline and core consumer price index (CPI) data were warmer than expected on Wednesday, underscoring the sticky nature of inflation in the first quarter of 2024. In response, market participants sharply scaled back their expectations for Federal Reserve interest rate cuts and sent the S&P 500 (SP500) tumbling to its worst weekly performance since October last year.
However, Lee appeared to be optimistic Friday, calling this week’s stock decline a “temporary moment of pain and an opportunity for redemption.”
“I think the narrative has become confusing, because the CPI report was a disappointment, but it was driven by what we call stubborn components: housing, auto insurance… the median core CPI component now only has the 1.7% inflation y/y. Average inflation is normalizing, it’s just not evident in the overall picture,” Lee told CNBC.
“What we would need are improvements in the consumer price index for April and May, which are future-proof and prevent the Fed from hampering the economy. What we don’t want is a Fed that wants to further slow the growth of the economy,” Lee said, adding that even a single interest rate cut this year would still be a good environment for U.S. stocks.
Despite the decline in stocks so far in April, Wall Street is not too far from record levels. However, analysts and traders are grappling with concerns about the market’s lofty valuations and how multiples have become too rich.
“When someone looks at 20 years of history, that’s the argument they’re going to make,” Lee told CNBC. “If you look at 90 years of P/E (price-to-earnings) multiples versus interest rates, when the 10-year (US10Y) is between 4% and 5% – which is a pretty wide range – the P/E And median is 20x. So we’re not even at an average P/E multiple of what existed whenever the 10-year (US10Y) stocks were in this range. And then if you look at the median stock, it’s actually at 16 times. “
“I would say there is a silver lining to earnings, I think multiples can expand. I don’t think 5,200 is the ceiling for stocks this year. I know it will be hard for investors to accept, but I think something like 5,600 -5,700 is probably where the S&P (SP500) ends the year, maybe even higher,” Lee added.
Lee’s forecast is among the most bullish on Wall Street. Earlier this year, Stephen Suttmeier, chief technical equity strategist at Bank of America, said the S&P (SP500) had great underlying potential to reach 5,600 points.
The benchmark index last closed on Friday at 5,123.41 points.