Cindy Ord
Fundstrat Global Advisors managing partner Tom Lee has made a bullish call about the market with a 5,700 points prediction for the benchmark S&P 500 (SP500), despite acknowledging that the latest consumer inflation report had “muddled” the narrative.
Lee made the remarks during an appearance on CNBC’s ‘Closing Bell’ segment on Friday.
The headline and core consumer price index (CPI) readings for March came in hotter than anticipated on Wednesday, underscoring the sticky nature of inflation in Q1 2024. Market participants in response sharply dialed 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 on Friday, calling this week’s retreat in stocks a “temporary moment of pain and a buy-the-dip opportunity.”
“I think the narrative got muddled, because that CPI report was a disappointment, but it was driven by what we call stubborn components: shelter, auto insurance … the median core CPI component now has only 1.7% Y/Y inflation. I mean inflation is normalizing, it’s just not evident in the total picture,” Lee told CNBC.
“What we’d need to see is April and May CPI improvements, which is in the future, and then keeps the Fed from standing in the way of the economy. What we don’t want is a Fed that wants to further slow the economy,” Lee said, adding that even just one interest rate cut this year would still be a good environment for U.S. stocks.
Despite April’s retreat in equities so far, Wall Street is not too far away from record levels. Still, analysts and traders are grappling with concerns over the market’s stretched valuations and about how multiples have become way too rich.
“When someone looks at 20 years of history, that’s the argument they will make,” Lee told CNBC. “If they look at 90 years of P/E (price-to-earnings) multiples versus interest rates, when the 10-year’s (US10Y) between 4% and 5% – which is a pretty big range – the median P/E is 20 times. So we’re not even at a median P/E multiple of what’s existed whenever the 10-year’s (US10Y) been in this range. And then if you look at the median stock, it is actually at 16 times.”
“I’d say that there is upside to earnings, I think multiples can expand. I don’t think 5,200 is the ceiling for stocks this year. I know this is going to be tough for investors to embrace it, but I think something like 5,600-5,700 is probably where the S&P (SP500) exits the year, maybe even higher,” Lee added.
Lee’s prediction is among the most bullish on Wall Street. Earlier this year, Bank of America chief equity technical strategist Stephen Suttmeier said the S&P (SP500) had a big base potential to reach 5,600 points.
The benchmark index last closed at 5,123.41 points on Friday.