FOLLOW US

Stocks are falling, yields are skyrocketing, and inflation is persistent. Yet Fundstrat's Tom Lee remains bullish in his view that the stock market will soar into year-end.

In a Friday note, Lee stuck with his thesis that the S&P 500 could rally to Fundstrat's year-end target of 5,100, representing a potential upside of 37% from current levels.

That's despite the Fed's Wednesday FOMC meeting, which resulted in another “jumbo” 75-basis-point interest rate hike, in addition to more hawkish hints from Fed Chair Jerome Powell. That commentary has led investors to expect even more rate hikes going into 2023, with a terminal fed funds rate of 4.6%.

Following the Fed's most recent meeting, short-term treasury yields surged to their highest level since 2007, while stocks have shed about 4%.

"Our continuing analysis shows leading indicators point to disinflationary/deflation," Lee said, highlighting an ongoing decline in the Manheim Used Vehicle Index, recent commentary from FedEx and Costco management teams about falling prices, and lower oil prices.

If inflation is indeed "dropping like a rock," then the "Fed could do far less tightening as the market is doing [the] Fed's work," he added. 

"Take a step back. If inflation by December 2023 is 2.8%, and Fed funds by December 2023 is 4.6%, this could be viewed by investors as constructive. After all, monetary policy by then is already restrictive, and there would be room to cut rates," Lee said.

"US corporates remain impressively resilient, enduring the pandemic global shutdown with cost discipline, and US corporates are weathering the inflation surge impressively as well," Lee said.

Finally, investor sentiment "is rock bottom and worse than the Great Financial Crisis by some metrics," Lee said. 

"There are greenshoots," Lee concluded.