Inventory market may see ‘fireworks’ by the tip of the yr as headwinds have ‘flipped,’ Fundstrat’s Tom Lee says

In Lee’s view, 11 headwinds that this yr helped drive the S&P 500 index to a 2022 low in October, together with surging oil costs and the Federal Reserve’s hurry to elevate rates of interest larger to battle hovering inflation, “have all flipped.” On Monday morning, U.S. oil was buying and selling on the lowest value of 2022 amid protests in China over the nation’s strict guidelines geared toward curbing the unfold of COVID-19, restrictions that traders worry will damage consumption and financial development.

Lee stated he noticed the easing of inflation in October, as measured by the buyer value index, as a “recreation changer” for markets, with the case for “a sustainable rally in equities” being the strongest that it’s been thus far this yr. Listed here are the 2022 headwinds that Lee sees changing into tailwinds.

Lee stated that softer inflation seen in October seems “repeatable” and that the easing of value pressures needs to be “adequate” for the Fed to sluggish its speedy tempo of fee hikes, with December probably being the final improve. Additionally, “if inflation is ‘as unhealthy as Eighties’ I’d have thought midterms would have been an incumbent bloodbath,” Lee stated of the current U.S. elections.

He stated that different current alerts level to “a far completely different path ahead for markets,” together with “collapsing” volatility within the bond market and a comparatively giant decline within the U.S. greenback. Lee pointed to the plunge within the CBOE 20+ 12 months Treasury Bond ETF Volatility Index, saying he anticipated {that a} additional decline would assist the S&P 500 hovering to 4,400 to 4,500 by year-end. 

The S&P 500 ended Friday down 15.5% for the yr, however up greater than 12% from its 2022 closing low on Oct. 12, in accordance with Dow Jones Market Knowledge.

U.S. shares traded decrease on Monday, with the S&P 500
SPX,
-1.39%
down 0.8% at round 3,995, in accordance with FactSet information. Within the bond market, 10-year Treasury yields
TMUBMUSD10Y,
3.709%
had been flat at 3.69% round noon Monday, whereas two-year yields
TMUBMUSD02Y,
4.463%
fell about 5 foundation factors to 4.43%. 

U.S. yields have not too long ago seen a “huge decline rating within the backside 1% largest draw back strikes up to now 50-years,” stated Lee. The percentages are rising that 10-year and 2-year yields could also be previous their peaks, probably supporting an enlargement in price-to-earnings multiples in shares, in accordance with his observe. 

“Skeptics will say “development is the issue now” and level to draw back” within the S&P 500’s earnings per share, or EPS, stated Lee.  However the index traditionally has “bottomed 11-12 months earlier than EPS troughs,” he stated. “So EPS is lagging.”

Learn: S&P 500 earnings estimates for 2023 take ‘full U-turn’ as recession dangers loom, in accordance with BofA

Additionally see: Barclays says money could also be ‘actual winner’ in 2023 whereas recommending bonds over shares