One of Wall Street's most bullish strategists sees the S&P 500 hitting new record highs in the second half of 2023. But unlike the many strategists who have pointed to AI as the driving factor for stocks through the rest of 2023, Fundstrat's Tom Lee sees things differently.
Lee noted AI as a "driver for the equity story" while also highlighting falling inflation, an economy unlikely to tip into recession, and investors with cash stockpiled and ready to buy equities as key reasons to be bullish on stocks.
Fundstrat raised its full-year S&P 500 price target from 4,750 to 4,825 on Monday in its 2023 mid-year outlook, with Lee noting a new bull market is taking hold.
"I know this sounds counterintuitive since we had no 'recession' nor 'Fed cutting rates,'" Lee wrote, "but we have 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."
Lee's note came just days after new data showed the core Personal Consumption Expenditures index increased 4.6% in May. While still starkly above the Federal Reserve's goal of 2%, it also marked a significant decline from inflation's peak above 9% just a year ago.
The research also follows a historically strong start to the year for stocks, which Lee himself predicted. AI-focused hype powered the Nasdaq Composite (^IXIC) to gain north of 31% while the S&P 500 (^GSPC) rose more than 15% in the year's first six months.
The Nasdaq's rally marked the best start of the year for the tech index since 1983, according to data from Bespoke Investment Group. And as Yahoo Finance's Jared Blikre recently noted, such first-half rallies are usually a good sign for stocks to close the year, too.
"By the way, +8% in 2H23 is the low end of what can be expected," Lee wrote. "Of the 9 times (since 1950) when S&P 500 saw >10% gains in first half AND was negative prior year, the median gain is +12%."
A 12% gain in the S&P 500 in the next six months would result in the index closing the year around 5,000.
Lee noted that the forward price-to-earnings ratio of the S&P 500 excluding FAANG stocks has increased just 0.7% despite a roughly 16% rally in the index to start the year. This might indicate that while some stocks outside of tech stocks have joined the rally, others may soon be on the way too.
Lee added, "Cyclicals should lead if financial conditions are easing," and he continues to advocate for tech stocks, industrials, and energy.
'A buy the dip regime'
As Lee often does, he admitted he's one of the more bullish strategists on the Street and expects "a lot of pushback from consensus." That continued to play out in the latest Bank of America Sell-Side Indicator data revealed on Wednesday.
The indicator, which tracks US sell-side strategists' average recommended allocation to stocks, rose by 33 basis points to 52.9% in June. That's the largest monthly increase since November 2022 but still bearish compared to the historical averages. Even with a rally to start the year, the indicator still sits 1.6 percentage points lower than where it started the year.
Interestingly, though, BofA views the Sell-Side Indicator as a contrarian indicator, meaning the current bearish positioning from strategists is usually a good sign for stocks. The current SSI reading indicates a 16% upside in stocks over the next 12 months, which would bring the S&P 500 to 4,800 at the end of the year and 5,200 in a year, BofA's head of US equity & quantitative strategy Savita Subramanian wrote.
So even if others remain bearish, Lee is siding with history and remaining bullish on stocks.
"Be prepared for volatility," Lee wrote. "But as we highlighted a few months ago, we have entered a 'buy the dip' regime, so 2% pullbacks are generally buyable. We saw this on display last week."
Josh is a reporter for Yahoo Finance.
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