On Monday, in an interview on CNBC’s “Squawk on the Street,” Tom Lee, Head of Research at Fundstrat Global Advisors, offered a compelling analysis of why the stock market has continued its upward momentum. Lee, who has recently raised his target for the S&P 500 to 6,000, explained the underlying factors driving the current rally, showing optimism about the future trajectory of equities.
According to Lee, many market participants had anticipated that the dramatic drop in inflation would lead to a slowdown in revenue growth, potentially stalling earnings. However, he observed that this had not been the case. Lee pointed out that S&P 500 companies are expected to post revenue growth of over 5% for the quarter. Adjusted for inflation, this represents over 2% growth, making it one of the strongest performances in the last two years. He said that this demonstrates the high quality of earnings this season, with over 80% of companies beating expectations so far, though it is still early in the reporting cycle.
Lee mentioned the recent earnings from the financial sector, noting that banks have largely exceeded expectations, performing well year-to-date. He pointed out that financials aren’t the only sector to watch, though. He identified the industrials, which make up about a quarter of the S&P 500, as another key area, especially sensitive to Federal Reserve policy. Lee suggested that as industrials report earnings, their performance in the face of challenges, like a prolonged slump in manufacturing activity, could provide further strength to the rally. Despite a weak ISM index, industrials have continued to perform relatively well, a point Lee emphasized as a positive sign.
Lee acknowledged that the upcoming U.S. elections could have a significant impact on market sentiment. He admitted that he initially expected the markets to be more cautious ahead of Election Day, given the closeness of the race. However, he explained that a potential Republican win in the Senate could spark optimism in the markets, as suggested by veteran investor Stan Druckenmiller. Lee believes that investors are betting on this scenario, which could ignite a new wave of enthusiasm for equities.
When asked about the potential for a deflationary period, especially in light of declining producer prices in Europe, Lee addressed the risks but downplayed their immediate impact on U.S. markets. He noted that oil prices, which can significantly affect headline inflation, have been volatile, but he does not expect these fluctuations to lead to a sustained resurgence in inflation. While transportation costs and seasonal factors may cause some short-term noise in inflation data, Lee believes that the market remains skeptical of any lasting inflationary pressures. He also noted that upcoming economic data, particularly the jobs report, could be distorted by events like the Boeing strike.
Lee reiterated his view that the Federal Reserve is likely on a path back to a neutral stance, which bodes well for equities. He suggested that despite recent fluctuations in economic data, the broader market trend remains positive. In Lee’s view, the stock market continues to present a “buy-the-dip” opportunity, as strong fundamentals, resilient earnings, and a favorable policy environment provide a solid foundation for future gains.
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