- The S&P 500 could surge to 4,600 within the next month, according to Fundstrat's Tom Lee.
- Lee expects a continued plunge in Wall Street's fear index, which would set equities up well for further gains.
- Strong market breadth suggests the rally in stocks won't be driven by mega-cap tech, Lee said.
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The stock market's push to record highs should continue in the next month, according to a Wednesday note from Fundstrat's Tom Lee.
Lee expects the S&P 500 will trade to 4,400 before mid-year, and said there is possible upside to 4,600 "maybe in the next month or so," representing potential upside of 10% from Wednesday's close. The potential move higher would come after the S&P 500 sold-off to key support at 4,137, Lee highlighted.
One key indicator that suggests the market has room to run higher is Wall Street's fear index, which has plunged under 20 in recent weeks. A drop below 20 in the volatility index is a risk-on signal for systematic investment funds that buy equities during periods of low volatility.
Lee expects the volatility index to continue its plunge to about 13.50, which would represent a decline of 23% from current levels of 17.50. "The VIX could break down further below that level," Lee added.
"Stocks are still in an uptrend" and market breadth is strong, as evidenced by the percentage of stocks trading above their 50-day moving average, Lee said.
Strengthening market participation amid the rally higher in stocks suggests mega-cap tech won't drive the upside, but rather small-cap stocks will.
"Megacaps likely underperform and small-caps likely resume leadership," Lee said.
As more upside potential remains in the stock market, Lee recommends clients overweight energy stocks as oil prices are set to rip higher.
"We expect institutional investors to massively overweight energy stocks before year-end. This would be a formula for a melt-up," Lee concluded.