Fundstrat’s Tom Lee has been getting a lot right about quick market moves in recent years. Since the pandemic and its aftershocks created a unique environment for stocks, Lee has made unconventional and sometimes bold short-term calls on where equities will go next. Better yet, the head of research and co-founder at Fundstrat has established a sterling track record as many of his predictions have panned out. For example, a call that the S & P 500 would rise 100 points on a positive consumer price index print came true last year. The next big test is his estimate that the S & P 500 should rise 4% in June to a record 5,500 points; it’s currently up more than 3.5% and briefly topped that level this week. .SPX 1M mountain The S & P 500 over the last month In an interview with CNBC Pro, Lee said he gets nervous “all the time” about making calls that offer specific timeframes and outcomes, something that’s considered difficult to successfully do given both have to be right. But Lee said his confidence to do so stems from the fact that these outlooks are based on history and probability. “As they say, it’s not good to try to pick level and time,” said the Wharton School accounting graduate. But, “a lot of times our work shows us both.” A ‘true’ inflation picture Another recent feather in his cap: Lee said that May and June should be strong after April’s correction. That’s true so far, with the S & P 500 jumping 4.8% in May after finishing April down 4.2%. Lee doesn’t expect to be right 100% of the time. One mistake made in recent years was an underestimation of inflation-induced “panic” in 2022, he said. He called understanding the “true” picture of inflation some of the most important work his team’s done over the past two years. While others look back to the 1970s and 1980s and are bracing for a second wave of accelerated price growth, Fundstrat is instead looking at the “internals.” Under the hood, Lee’s found about 55% of the components of the consumer price index are below pre-pandemic averages. That offers a different picture than the whole basket, which remains at rates well above the Federal Reserve’s 2% annual goal for inflation. “The inflation problem on a headline still looks bad, but that’s largely because of shelter [housing] and auto insurance,” he said. “But once those start to correct, the rest of the inflation picture looks pretty good.” Still, he said negative inflation surprises seen early in 2024 have held back small cap stocks, with the Russell 2000 down about 0.5% on the year while the S & P 500 is ahead almost 15%. Despite this tough start, Lee said in March that he sees the small cap-index surging by 50% in 2024. While that would require a huge turnaround, Lee said he believes small caps can see a big rally as more recent inflation readings are welcomed by the market. He also noted that the Russell 2000 climbed more than 20% over the last 2 months of 2023, so investors shouldn’t dismiss target given there’s six months to go this year. “I think small caps could have a huge price change,” Lee said. “I don’t feel like there’s anything flawed about our small cap call.” .RUT YTD mountain The Russell 2000, year to date Ultimately, Lee said all of his calls are rooted in probability and precedent that explain why something could be repeated in the current market. Looking at the highest likelihood for a range of outcomes offers confidence when predicting a directional move or its magnitude, he said. A ‘defining’ moment for tech In Lee’s eyes, his record of understanding the current market goes back to how he viewed 2022’s selloff. As equities struggled, (the S & P 500 fell almost 20% in 2022), Lee felt like the risk of inflation was being mispriced. Because of that, he foresaw a rebound in 2023, a year that sent the S & P 500 more than 24% higher. He maintained that bullish view throughout 2023, even as hiccups led others to waver. During the regional bank selloff in March of that year, Lee saw it as a short-term drawdown rather than the start of a bigger crisis. Amid concerns over the U.S. debt limit in October, he told clients to instead focus on inflation that was trending lower. Throughout the year, he argued that big technology stocks like Meta , Amazon , Apple , Netflix and Alphabet would lead the rebound. That was an unpopular view, he said, after 2022 raised questions as to whether tech’s market leadership was done for good. Instead, the tech-heavy Nasdaq Composite soared more than 40% last year, in what Lee called a “defining moment” for the sector. “The ones who were hawkish in 2022, and said the market was going to go down, no evidence changed their mind in 2023,” said Lee, a JPMorgan and Salomon Smith Barney alum. “A lot of people stuck to a really bearish view last year, and missed a recovery to all-time highs.” Bullish on the future Lee said a recession could make him turn bearish on stocks. But Fundstrat’s constructive view in recent years is partly because the risk of a downturn isn’t as great as believed, he said. “There was a pretty widely-held view that the Fed had to crash the economy in order to contain inflation,” Lee said. “But our view is that inflation was going to normalize pretty quickly.” While he said neither outcome was completely correct, “it’s probably tracked closer to our view, because the Fed has not had to create a recession to control inflation.”
Read More: Fundstrat’s Tom Lee keeps making bold stock calls — and nailing them
