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5 reasons the stock market is headed for a 4% gain in June, according to Fundstrat

Matthew Fox   

5 reasons the stock market is headed for a 4% gain in June, according to Fundstrat
  • The S&P 500 is primed to rise 4% in June, according to Fundstrat's Tom Lee.
  • Lee highlighted five catalysts that could drive the stock market higher next month.

The stock market is poised to rise another 4% in June after jumping 5% in May, according to a Tuesday note from Fundstrat's Tom Lee.

Lee said the S&P 500 could jump to 5,500 within the next month, driven by five positive market catalysts.

"We see positive supports for stocks in June, hence, buy the dip (if it comes)," Lee said.

The first catalyst is bullish seasonals. Since 1927, there have been 17 instances when stocks were up in the first quarter of the year and then saw a decline in April. This setup, which has happened already this year, bodes well for strong gains in May and June.

Lee highlighted that the win ratio of stocks rising in June is 100%, with a median gain of 3.9%. Such a gain would send the S&P 500 to new all-time highs.

"The seasonal argument alone is positive," Lee said. "That's why we think there's still gas in the tank."

The second catalyst is inflation, or rather continued disinflation, according to Lee, who is expecting several favorable inflation data points over the next few weeks. That starts with Friday's release of April Core PCE, followed by the release of May CPI on June 12.

A continued decline in used car prices, a surge in new car inventories, and declining trends in owners' equivalent rent all give Lee confidence that inflation should continue to move lower. If that does happen, the likelihood of rate cuts should rise in the second half of the year.

"I think the odds of the number of Fed cuts by the end of the year is actually going to start creeping up again," Lee said.

The market currently expects just one interest rate cut in 2024, and if more rate cuts begin to get priced into the market, that should act as a tailwind for stocks.

The third catalyst is investors' low utilization of leverage, which suggests the type of euphoria often seen at market peaks is nowhere to be found. Lee highlighted that NYSE margin debt of $775.5 billion is still 17% below its 2021 peak of $936 billion.

The fourth catalyst to push stocks higher in June is the record $6 trillion sitting in cash on the sidelines. But Nvidia's blowout earnings results last week could jolt investors to finally put that cash to work and buy stocks, according to Lee.

Finally, the fifth catalyst that should push stocks higher in June is solid corporate earnings results, which show that profits continue to rise.

"Earnings season shows the fundamental story of the economy is intact and I think AI is getting stronger," Lee said.

With 97% of S&P 500 companies having reported first-quarter results, earnings per share have beaten consensus estimates by 3%, and while the earnings gains were led by the Magnificent Seven stocks, the other 493 stocks in the S&P 500 delivered solid results, according to data from Bank of America.

"Moreover, despite concerns around high expectations for 2H, earnings estimates for the remainder of 2024 slightly rose QTD," Bank of America said in a Tuesday note.

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