- The stock market has faced a growing wall of worry in recent months as equities have traded in range-bound fashion.
- But that wall of worry is set to be obliterated by an equity melt-up, according to Fundstrat's Tom Lee.
- He expects the S&P 500 to surge to 4,400 by mid-year, representing 6% upside potential from current levels.
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A growing wall of worry in the stock market is set to be obliterated by an equity melt-up as stocks cruise to record highs by mid-year, according to Fundstrat's Tom Lee.
In a Friday note, Lee reiterated his view that the S&P 500 will surge to 4,400 by mid-year, representing potential upside of 6% from Thursday's close.
The move higher would help investors overcome what has been a growing wall of worry as stocks have traded range bound for months. That wall of worry includes technology stocks lagging, inflation picking up, higher taxes, and "sell in May" seasonality, among others.
"A nervous investor can cite a litany of reasons to be concerned and therefore bearish," Lee explained.
But several factors support a potential melt-up in the stock market that could put to rest much of those investor worries, according to Lee. Those factors include US economic momentum strengthening, a "low-energy" surge in the Cboe Volatility Index (VIX) that is quickly reversing, and institutional investors sitting on a $3.1 trillion pile of cash, nearly matching the record levels seen in May of 2020, according to the note.
One sign of a strengthening economy is the recent data release of the Leading Economic Index by the Conference Board. The more recent reading of US LEI surged 17% year-over-year, and also jumped 1.6% month-over-month.
"This makes sense, as the US economy is gaining momentum from re-opening," Lee explained. Historically, the stock market has posted an average 6-month return of about 8% when the LEI surges more than 7% year-over-year, with a high win ratio of 82%, according to the note.
This implies the S&P 500 would surge past 4,480 by November, Lee said. And the gains could continue, as a strong LEI reading is usually a sign of the uptrend in stocks being early-cycle rather than mid- or late-cycle.
"When LEIs are this strong, equities are usually early cycle," Lee concluded.
