Fundstrat Predicts Possible Market Rally to Re-Test All-Time Highs on Thesis-Changing Last Rate Hike by Fed

According to Tom Lee, Fundstrat’s strategist, stocks are at a pivotal moment this week. This is due to the anticipated last rate hike by the Fed, which could drive the S&P 500 to retest its all-time-high from early 2022. Lee’s view is supported by falling inflation indicators and the limited impact of banking turmoil.

According to Fundstrat’s Tom Lee, easing inflation indicators could force the Fed to adopt a less hawkish monetary policy. This is supported by the downtrend in prices since June of last year, including housing and manufacturing prices. Lee is of the opinion that the recent banking turmoil at First Republic Bank is unlikely to result in financial contagion. Therefore, he believes that the Fed will issue its last rate hike this week. Despite correctly predicting an all-time-high for the S&P 500 in 2022, which did not occur, Lee remained bullish on stocks throughout the bear market. In April, Lee predicted that the index would see its strongest rally of the year, although stocks only rose by a modest 1% last month, falling short of his thesis.

Tom Lee noted in a Monday report that it’s widely expected the Fed will announce another 25-basis-point rate hike this week. The Fed has increased interest rates by 475 basis points over the past year to combat inflation. Currently, markets are pricing in an 86% chance of a quarter-point increase after the next policy meeting concludes on Wednesday, and a 62% chance the Fed will begin to pause interest rates in June, per the CME FedWatch tool. If there is a Fed pause, this could be a crucial moment for the stocks, as equities were heavily impacted by steep rate hikes in 2022. Lee predicts that this will be the last hike of the cycle and that the S&P 500 could hit 4,750 by the end of 2023, close to its record high of 4,796 in January of last year.