Wall Street’s biggest bull is getting more bullish on the stock market after the first half of the year delivered eye-watering gains for investors, with the S&P 500 up about 16% while the Nasdaq 100 surged 39%.
Fundstrat’s Tom Lee raised his year-end S&P 500 price target to 4,825 from 4,750 in a Monday note, which would represent potential gains of 8% from current levels and new record highs for the stock market, if reached.
His confidence in his bullish market call is derived from an ongoing decline in inflation, which should give the Federal Reserve more breathing room in its monetary policy decisions, as well as stock market valuations that are “not demanding” and a potential boom in productivity thanks to artificial intelligence.
“We had a huge decline in inflation, and as we argued for most of 2022, the inflation war is the war the Fed is waging and seemingly winning,” he said, adding that he expects headline inflation to downshift towards 3% by the end of the year.
If consensus expectations on Wall Street turn more dovish in line with that view, stock prices could jump as investors begin allocating their $5.5 trillion cash pile back into equities, according to Lee.
He also observed that the forward price-to-earnings ratio of the S&P 500, excluding mega-cap tech stocks, was 15.7x at the start of the year, and now stands at 16.4x, which is “barely” higher. Lee said he expects the valuation multiple to continue to expand for the stock market as corporate earnings growth inflects positively.
“We believe P/E should expand as companies are viewed as resilient and we are at the start of a new EPS cycle,” he said.
Also helping drive that profit growth, as well as a continued rally on the stock market, is the rise of AI, which Lee referred to as a potential “supercycle” akin to the advent of the PC in the 1980’s, the internet in the 1990’s, and cloud computing in the 2010’s.
“AI could be the start of a supercycle,” Lee said, highlighting a recent presentation from Coatue Capital. “And Nvidia first-quarter results were the ‘aha’ moment. The timing makes sense. AI also solves the inflation problem. By the way, doesn’t this justify the surge in FAANG? Not as a bubble but as the sign of the emergence of this cycle.”
Lee remains by far the most bullish market strategist this year. The average S&P 500 year-end price target is just 4,091, according to data from Bloomberg. The most bullish market strategist after Lee is Brian Belski of BMO, who has a 4,550 year-end price target for the S&P 500.
