- Fundstrat's Tom Lee has been unwavering in his view that the S&P 500 will rally into year-end.
- But ongoing volatility stemming from a potential policy change by the Fed has put that call at risk.
- These are the six reasons why Lee still expects the S&P 500 to rally to as high as 4,800 over the next two weeks.
Fundstrat's Tom Lee can't seem to catch a break with his steadfast call that the S&P 500 could rally as much as 4% from current levels to 4,800 by year-end.
And while the S&P 500 closed at a record high of 4,712 on Friday, the index subsequently fell as much as 2% so far this week as investors fret over a potential policy change announcement from the Fed at Wednesday's meeting.
"Nobody want to be a hero in front of FOMC [meeting] and technicals have suffered some damage. But base case remains YE rally," Lee said in a Tuesday note.
Investors have labeled hawkish Fed policy, including potential interest rate hikes, as the No. 1 tail risk currently impacting equities, according to Bank of America's fund manager survey. Meanwhile, the bond market is currently pricing in three interest rate hikes for 2022, according to a note from JPMorgan.
Three interest rate hikes would be a shock to investors who have been conditioned to expect nothing but easy monetary policies from the Fed since the onset of the COVID-19 pandemic.
But according to Lee, a potential hawkish pivot by the Fed this Wednesday is already priced into markets, and a record rally in the stock market could materialize over the next two weeks for these 6 reasons.
"Positive seasonals."
According to data from LPL, the S&P 500 has on average returned 1.5% in December, making it the third best month of the year for returns. Additionally, the stock market generates a positive return 74% of the time in December, more than any month of the year.
Finally, the "Santa Claus rally" describes the seven trading days after Christmas that have on average generated returns of 1.3% for the S&P 500, with a positive hit rate of 78%.
"Positioning data."
Investors and consumers are hoarding cash, according to various readings including Bank of America's recent fund manager survey, with cash allocations jumping to 5.1%, generating a tactical buy signal. An earlier note from Lee highlighted more than $3 trillion in institutional cash sitting on the sidelines.
"Negative sentiment."
The most recent sentiment survey from AAII showed bullish responses well below its historical average, while bearish responses were near their historical average. The CNN Fear and Greed indicator is currently in "Extreme Greed" territory with a reading of 24.
"Omicron could peak."
Any sign of a peak in Omicron cases in South Africa or the UK could provide relief to investors anxious about a potential resurgence in the pandemic.
"FDA could approve COVID-19 therapeutics."
A final analysis of Pfizer's COVID-19 antiviral pill showed it was 89% effective in preventing hospitalizations of COVID patients. Relieving pressures of America's hospital system will help further a return to post-pandemic normalcy. The pill also showed effectiveness against the Omicron variant, and could receive emergency use authorization within weeks.
"Fed meeting will be in the rear view mirror."
Wednesday's highly anticipated Fed meeting will soon be in the rear view mirror, and with three 2022 rate hikes already priced into the markets, any dovish tilt from Chairman Powell could serve as a catalyst for higher equity prices.