Tom Lee from Fundstrat Global Advisors predicts that the S&P 500 will experience a significant rally, reaching 5,200 by the end of next year. This anticipated increase of approximately 14% from its current level is based on Lee’s analysis of falling inflation, which he believes will lead to lower interest rates and a faster improvement of financial conditions. As a result, corporate earnings and stock-market valuations are expected to receive a boost.
Despite concerns about a “weak” labor market in the first half of 2024, Lee remains optimistic that the U.S. economy will avoid a recession in that year. The potential cut in interest rates by the Federal Reserve is predicted to ease financial conditions, ultimately resulting in a rise in consumer income and improved purchasing power.
Furthermore, Lee foresees a drop in 30-year mortgage rates and increased demand from American corporations, resulting in a more favorable macroeconomic environment in 2024. He expects the price-to-earnings ratio (P/E) for the S&P 500 to expand towards 20 times 12-month forward earnings, which is higher than the current P/E ratio of over 18 times forward earnings. Historical data supports Lee’s argument, as it indicates that when Treasury yields were between 4% to 5%, the S&P 500’s P/E was above 18 times forward earnings around 65% of the time.
Lee also forecasts an 8.3% growth in S&P 500 earnings-per-share (EPS) to $260. This growth is driven by a cyclical EPS recovery and improved financial conditions leading to a recovery in capital expenditures.
It is worth noting that Lee’s target for the S&P 500 at the end of next year is higher than the average forecast of 11 sell-side strategists polled by MarketWatch. Despite being one of the most bullish forecasters on Wall Street, Lee accurately predicted the stock-market rally in 2023 and expects the S&P 500 to reach a new all-time high of 4,825 in the final weeks of this year.
Overall, Tom Lee’s predictions and analysis suggest a positive outlook for the S&P 500, with expectations of significant growth and improved financial conditions in the coming years.
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