Fed can live with S&P 4,500 with stage set for a strong rally


Stocks have been “obliterated” and the recent stock gains look like more than a simple bear-market rally, Fundstrat Tom Lee says.

For much of 2022 the consensus looked to be a drop in the S&P 500 (SP500) (NYSEARCA:SPY) to 3,200. But investor perception of risk is no longer one-sided, with inflation pressures easing and the Fed becoming more data dependent, Lee wrote in a note.

The S&P “is down -20% in nominal terms, but down -28% on ‘real terms’ (CPI adjusted),” Lee said. “The Fed has won. Stocks have been obliterated.”

“But this also means a 50% rally in equities would still leave stocks -15% on a ‘real basis’ – in other words, S&P 500 4,500 would still be consistent with Fed’s goals of tightening financial conditions.”

Even “if this proves to be a ‘bear rally,’ the ingredients are in place for a rally far stronger than the “June pivot hopes” rally, which lasted 23 trading days and rose +16%,” Lee added.

During the June pivot rally, only headline CPI had peaked, while JOLTs showed openings/workers at about 2. Now that ratio is 1.67 and falling, while more economists are calling for “substantial declines” in core CPI, Lee noted.

In addition, “investor positioning is far more bearish now than anytime in 2022.”

“Taken together: doesn’t it make sense a rally should exceed the ‘false dawn pivot’?,” Lee said, adding, “consider a possible 30-50 day rally and 20-25%?”

The one “fly in the ointment” is the continued surge in 10-year yields (US10Y) (TBT) (TLT).

BofA client flows show investors continuing to pile into single stocks.

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