- The stock market will print another gain in 2022 for the fourth consecutive year, according to Fundstrat's Tom Lee.
- Lee expects the S&P 500 to rally 11% to 5,100 by the end of next year, with big volatility in the first half.
- These are the three key reasons why Fundstrat expects the S&P 500 to continue its rise in 2022.
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The S&P 500 will continue its rise in 2022, jumping at least 11% to 5,100 and marking its fourth consecutive calendar year gain, according to Fundstrat's Tom Lee.
In a presentation to clients on Tuesday, Lee said he expects the upcoming midterm election year to be bumpy in the first half, with at least a 10% decline likely. Driving that potential sell-off will likely be a surge in COVID-19 cases, lingering "supply chain glitches," and investor concerns about a hawkish Fed.
But from there, stocks should enter risk-on rally mode and set records through out the second half of 2022 as inflation flattens out, labor tightness eases, and the "Fed band aid" is pulled off, according to Lee.
Those factors, combined with an 8% rise in S&P 500 earnings per share to $250, creates the base case for a 5,100 year-end price target.
"Economic growth remains robust, [which means] resilient equity markets," Lee summarized.
These are three key reasons driving Lee's bullish stock market forecast for 2022, according to the presentation.
Inflation is transitory.
Inflation should begin to normalize in 2022, according to Lee, who noted that goods are primarily driving a bulk of the higher prices. "Most of inflation rise in 2021 in supply chain related," Lee explained, pointing to a surge in prices in used cars, new vehicles, and home furnishings, among others. But as the supply chain normalizes, inflation should retreat.
Midterm elections data.
The 2022 midterm elections could introduce market volatility as investors consider the legislative roadmap in Washington, D.C.
But whether Democrats keep control of both chambers of Congress, or if they lose one chamber in November and split control with Republicans, stocks perform well. In both scenarios, the stock market has on average fell between 5% and 7% in the first half of the year, respectively, before going on to recover those losses and return 14%-22% in the second half of the year.
"Guaranteed TINA"
There is no alternative. That's been a driving force for stock prices over the past decade as investors have few options to invest their money with interest rates near historic lows. And in 2022, TINA could become "guaranteed," according to Lee. That's because if inflation runs above 3%, most fixed income securities will likely lose money.
The Risks
There are still big risks to the stock market that could throw off Lee's bullish projection, including a Fed policy error, continued supply chain glitches which results in continued inflation, and more variants of COVID-19, among others.