Tom Lee of Fundstrat, one of the only analysts who entered 2023 from a bullish point of view, made a big call this morning: Tom Lee thinks the S&P 500 will rally 100 points this week — akin to a gain of about 2.3%.
KEY POINTS
- Tom Lee of Fundstrat predicts a 100-point rally and 3% surge in the S&P 500 following the release of the core Consumer Price Index (CPI) report.
- Lee bases his optimism on strong job reports, yield spikes, and the expectation of a low core CPI, indicating that the Federal Reserve is effectively managing inflation.
- Deflationary trends in used car prices and China’s consumer prices further support Lee’s projection, while he also revises his year-end target for the S&P 500 to 4825.
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How to Trade Lee’s Prediction with Options
If you were inclined to make this trade, you would be targeting the 448.50 level in SPY (SPY was trading at roughly 438.50 when Lee made the call). You could do that by purchasing a $447 call and selling a $448 call at the July 14th expiration to form a call debit spread, limiting your upside gain to slightly under Lee’s predictive mark. The trade would cost $0.10 per spread and has the potential of expiring at 10X value, $1.00 per spread, if Lee’s prediction comes to fruition.
More About Tom Lee’s Prediction
Lee’s optimistic outlook is grounded in several key factors. Last week’s strong jobs report and subsequent yield spikes laid the foundation for what he sees as a tactical opportunity in the market. Moreover, Lee expects the core Consumer Price Index (CPI) for the current week to register at 0.2 or lower, which would mark the lowest level since August 2021. This potential break from the existing pattern would indicate that the Federal Reserve’s efforts to target inflation are yielding results, as 0.2 represents an annualized rate of 2.5%. The recurring nature of such low numbers might even persist over the next two months, according to Lee.
Lee expects the core Consumer Price Index (CPI) for the current week to register at 0.2 or lower, which would mark the lowest level since August 2021.
One noteworthy deflationary trend contributing to this outlook is the decline in used car prices. Currently, 42% of the CPI basket is experiencing deflation, indicating that prices were higher at some point within the past 18 months. This figure surpasses the long-term average of 30% and the 10-year average of 38%. Lee predicts that future inflation will decrease, particularly when considering that shelter costs, which constitute a substantial portion of the CPI, continue to rise at 8%. Once shelter costs stabilize, the proportion of items in deflationary territory could reach 70% or higher.
If reached, this would be the highest value in the S&P 500 since April of 2022. Source: Market Rebellion, TradingView
Lee also acknowledges deflationary pressures in China, where consumer prices have fallen below expectations. Interestingly, he observes a correlation between China’s Producer Price Index (PPI) and the corresponding measure in the United States.
Last week, Tom Lee revised his year-end target for the S&P 500 upward to 4825.
Addressing earnings, Lee identifies energy as a primary hindrance. While energy once contributed to earnings, it has now become a 25% drag on the sector’s performance this quarter. However, excluding energy-related factors, S&P earnings have actually increased year over year. This development represents the first positive year-over-year growth, excluding energy, since the first quarter of 2022.
Despite lingering skepticism in the market, Lee believes that the CPI report could be a catalyst for change. By presenting positive news that supports the Federal Reserve’s decision to taper its policies, this data may help dispel doubts and bolster investor confidence.
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Moving beyond equities, Lee also briefly shared his views on Bitcoin. Years ago, he accurately predicted Bitcoin’s ascent from $2,000 to $20,000. Now, Tom Lee forecasts that the preeminent cryptocurrency will reach $200,000 by the end of 2025.
Eric Rosenberg, former President of the Federal Reserve, responded to Lee’s interview by suggesting that if core inflation does indeed decline, it would likely discourage further rate hikes beyond July. This viewpoint aligns with Rosenberg’s dot plot, which suggests that the Fed will back off for the remainder of the year after July.
In short: Tom Lee didn’t have to make this call – but he did. Tom Lee was already receiving plenty of accolades for being one of the few correctly bullish analysts on the street. Now, it’s time to ask whether he’ll be right again as he makes another do-or-die prediction. Tom Lee’s bullish outlook on the S&P 500, combined with his analysis of key economic indicators, suggests that a significant rally is on the horizon. With the upcoming CPI report potentially providing a positive narrative for the Federal Reserve, Lee’s forecast could prove instrumental to traders looking to capitalize on a key event for the market.
