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The S&P 500 is poised to rally to 5,200 by the end of next year, roughly 14% from its current level, said Tom Lee, an enduring equity bull and the head of research at Fundstrat Global Advisors.
Lee on Thursday said he expects falling inflation to translate to lower interest rates and faster-than-expected erasing of financial conditions, which should boost corporate earnings and stock-market valuations.
The U.S. economy also “probably” avoids a recession in 2024, he said, even if the labor market would be “weak” in the year’s first half.
“As we move into 2024, investor skepticism has diminished but investors are generally wary. We are overall positive on equities, but we believe much of the gains will come in the second half of 2024,” Lee wrote, in a Thursday note to clients.
An easing of financial conditions, driven by expectations that the Federal Reserve will stop raising interest rates, and even start cutting rates next year, will result in a rise in consumer income, a result of improved purchasing power and real wage gains.
He also sees a drop in 30-year mortgage rates and “pent-up” demand from American corporations next year, which will produce “a far better macro backdrop than 2023,” Lee said.
Specifically in stocks, Lee expects the price-to-earnings ratio (P/E) for the S&P 500
SPX
to expand in 2024 toward 20 times 12-month forward earnings. The large-cap index is now trading at over 18 times forward earnings, according to FactSet data.
Lee argued that since 1937, when the 10-year Treasury yields sat between 4% to 5%, the S&P 500’s P/E topped 18 times forward earnings about 65% of the time. The yield on the 10-year Treasury
BX:TMUBMUSD10Y
was up 1 basis point to 4.127% on Thursday afternoon.
As for earnings, Lee foresees an 8.3% growth in S&P 500 earnings-per-share (EPS), to $260, driven by cyclical EPS recovery and easing financial conditions that could lead to a recovery in capital expenditures.
See: What 2024 S&P 500 forecasts really say about the stock market
Lee’s target for the S&P 500 for the end of next year is 8.1% higher than the 4,811 average forecast of 11 sell-side strategists polled by MarketWatch last week.
Lee remains one of the most bullish forecasters on Wall Street. He also was one of a few strategists who correctly called the stock-market rally in 2023. In the year’s final weeks, Lee still sees the S&P 500 notching a new all-time-high of 4,825.
The S&P 500 was up 0.8% on Thursday to 4,587, while the Dow Jones Industrial Average
DJIA
was 0.3% higher and the Nasdaq Composite
COMP
was on pace for a 1.3% gain, according to FactSet data.
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