Stock market could see ‘fireworks’ through the end of the year as headwinds have ‘flipped,’ Fundstrat’s Tom Lee says

According to Tom Lee, head of research at Fundstrat Global Advisors, several of the headwinds that shook the stock market in 2022 have turned into headwinds, setting the stage for a rally in US stocks heading into the end of the year.

“Thanksgiving is over and markets are now entering the final key weeks of 2022,” Lee, head of research at Fundstrat, said in a statement on Monday. “While many may be tempted to ‘close the books’ on the year, we think the last 5 weeks will be ‘fireworks’.

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According to Lee, the 11 headwinds that helped send the S&P 500 to a 2022 low this October, including rising oil prices and the Federal Reserve’s rush to raise interest rates to combat surging inflation, “have all rolled over.” U.S. oil traded at its lowest price in 2022 on Monday morning amid protests in China over the country’s strict rules aimed at curbing the spread of COVID-19, restrictions that investors fear will hurt consumption and economic growth.

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Lee said October’s decline in inflation, as measured by the consumer price index, was seen as a “game changer” for markets, and the case for a “sustained stock rally” was the strongest so far this year. Here’s the 2022 headwind that Lee sees as a tailwind.

FUNDSTRAT NOTE DATED NOV. 28 of 2022

Lee said the softer inflation seen in October looked “repeatable” and that easing price pressures should be “enough” for the Fed to slow its rapid pace of rate hikes, with December likely to be the last hike. Also, “with inflation ‘as bad as the 1980s,’ I would have thought the midterms would have been a massacre,” Lee said of the recent US election.

He said other recent signals point to “a much different path forward for markets,” including “collapse” swings in the bond market and a relatively large drop in the U.S. dollar. Lee pointed to the decline in the CBOE 20+ Year Treasury Bond ETF Volatility Index, saying he expects further declines to push the S&P 500 up to 4,400 to 4,500 by the end of the year.

The S&P 500 ended Friday down 15.5% for the year, but down more than 12% from its 2022 closing low on Oct. 12, according to Dow Jones market data.

US stocks traded lower on Monday with the S&P 500 SPX,
-1.09%
down 0.8% to about 3,995, according to FactSet data. In the bond market, the 10-year treasury yields TMUBMUSD10Y,
3.708%
around midday Monday was flat at 3.69%, while the two-year yield TMUBMUSD02Y,
4.471%
decreased by approximately five basis points to 4.43%.

U.S. yields have recently seen a “huge decline, the bottom 1% of the biggest recession in 50 years,” Lee said. Chances are rising that the 10-year and 2-year yields could exceed their highs, potentially boosting stock price and earnings multiples, his note said.

“Skeptics will say ‘growth is the problem now’ and point to downside in the S&P 500’s earnings per share, or EPS, Lee said. But historically, the index has bottomed 11 to 12 months before EPS falls, he said. “So EPS is lagging.”

To read: According to BofA, S&P 500 earnings estimates for 2023 are taking a “full turn” as the risk of a recession looms.

See also: Barclays says cash could be ‘real winner’ in 2023, while recommending bonds over shares

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