Stocks will see 'fireworks' in the last 5 weeks of the year as cooler November inflation to be another game changer, Fundstrat says

Stocks will see 'fireworks' in the last 5 weeks of the year as cooler November inflation to be another game changer, Fundstrat says
Tom Lee was formerly JPMorgan's chief equity strategist.Brendan McDermid/Reuters
  • Stocks could see "fireworks" through year-end on cooling November inflation, Fundstrat's Tom Lee said.
  • Lee said inflation pressures are in the rearview, with November CPI set to be a game changer.

Stocks will see "fireworks" in the last five weeks of the year, as signs point to cooler November inflation, according to Fundstrat's Tom Lee.

In a note on Monday, the head of research reiterated his view that softening inflation would change the Federal Reserve's hawkish stance on raising rates to bring prices down. Fed chair Jerome Powell said earlier this month he didn't see a case for "real softening just yet," and investors are pricing in a 50-basis-point rate hike in December. But October's inflation report clocked in below economists' expectations at 7.7% – a sign that prices are cooling considerably as the central bank tightens the economy.

The October CPI report sparked a steep rally in stocks and represented a game changer for the market, Lee said, adding that November's Consumer Price Index report could do the same.

"Thus, while many may be tempted to 'close the books' for the year, we think the final 5 weeks will be fireworks," he added.

Lee's bullishness is at odds with other top commentators. JPMorgan CEO Jamie Dimon and "Dr. Doom" economist Nouriel Roubini, among others recently, have warned stocks could see a steep fall in the face of a looming recession. Roubini, who foresaw the 2008 crash, pointed to issues like sticky inflation, which could lead to another stagflationary crisis hitting the economy.


But inflation is largely in the rearview mirror, Lee argued. Experts have noted major pieces of inflation data often lag behind the official statistics by around 18 months, and the Fed's rate hikes also take time to impact the economy—meaning prices could already be well on the way down. And while some have sounded the alarm on a Fed-induced recession, that will only happen if central banks don't change their policy in response to cooling inflation, Lee said.

Lee sees a major rally coming, predicting the S&P 500 to reach 4,400-4,500 by year-end, about 10% higher from current levels. That's revised from his previous target of 4,800, but Lee pointed to signs of an incoming inflows to stocks, which support his prediction of a new rally. Risk appetite among institutional investors has plunged to its lowest level in history, according to Bank of America, and the bull-spread for retail investors, a year-average of investor sentiment, is also at its lowest on record, according to Bloomberg data.

"In our view, the case for owning equities is the strongest now than it has been in all of 2022," Lee said, noting investors may be held back by recency bias, having seen bearish conditions all year.