- Stocks are flashing a bullish signal and could move higher this year, Fundstrat’s Tom Lee said.
- He pointed to the S&P 500 topping its 200-week moving average and staying there at least 25 weeks.
- “Our base case framework is that inflation will soon roll over hard over the summer,” Lee added.
Stocks are flashing bullish signals as inflation continues to cool down, according to Fundstrat’s head of research Tom Lee.
In a note on Monday, he pointed to the S&P 500 hovering above its 200-week moving average for the last 25 weeks. In the 12 instances that has happened since 1950, the S&P 500 has moved higher every time.
“Doesn’t this sound like a bull market?” Lee said, maintaining that equities were overall on the upward trend despite some choppiness ahead of the Fed’s next policy meeting in May.
He added that the general rise in stocks is supported by cooling inflation indicators. Over the last month, housing and food prices, which make up a major portion of headline inflation, continued to decelerate.
That could bring downward pressure to 48% of the consumer price index, and suggest that over 80% of the CPI is facing disinflationary pressures, Lee estimated.
“Our base case framework is that inflation will soon roll over hard over the summer,” he wrote. “The forward indicators argue a steep drop is coming.”
Inflation notched a 41-year-high in 2022, prompting Fed officials to hike interest rates over 1,700% to tame high prices. That weighed heavily on stocks, with the S&P 500 slumping 20% last year.
Markets are expecting the Fed to raise interest rates another 25 basis-points at their next policy meeting, and officials have suggested rates could stay restrictive all year as high prices still remain a threat.
Still, a pullback in inflation could ease pressure on firms and lead the central bank to dial back rates, which Lee previously said could jumpstart a new bull market for stocks.
To be sure, Lee has been bullish on equities over the past year and incorrectly predicted that stocks could notch a new high in 2022 and see their strongest rally by April of this year.
But the S&P 500 has stayed relatively flat throughout the month – which Lee admitted was a “disappointing” performance, though he maintained the index could rally at least another 2% in the last five trading days of April.