- Stocks could still perform well this year even if rate cuts are fewer than markets initially expected.
- Fundstrat's Tom Lee predicted the S&P 500 could rise to 5,700 by the end of the year.
- Equities will be powered higher by a strong economy and generally cooling inflation, he said.
Dwindling hopes for Fed rate cuts won't necessarily derail the stock market's upward trajectory through the rest of this year, according to Fundstrat's head of research Tom Lee.
Lee, one of the most bullish forecasters on Wall Street, predicted the S&P 500 could jump to 5,700 by the end of the year, implying another 13% upside for the benchmark index. The market doesn't need Fed rate cuts to do well, he said in a recent interview with CNBC, assuming that the economy remains strong and inflation continues to cool.
The economy looks like it's meeting those conditions so far, Lee added. Corporate earnings look strong, with the S&P 500 on track to notch at least 7% earnings growth this quarter, according to FactSet. Economic growth has also remained resilient, with the economy expected to grow 2.9% over the first quarter, per estimates from the Atlanta Fed.
And while headline inflation came in hotter than expected in March, most components of the consumer price index are actually posting around 2% year-per-year price growth, in-line with the Fed's long-run target. Not accounting for auto, housing, energy, and food prices, annualized inflation clocked in at 2.7% last month, Lee said, suggesting that inflation was cooling overall.
"We don't really need the Fed to make three cuts," he added.
But the only risk that looms over stocks is if inflation comes in hotter than expected, prompting the Fed to issue another rate hike, Lee warned.
"I think that's still very much a tail scenario, but that would be the one to rattle markets the most," he said.
Hot inflation figures have led investors to dial back their outlooks for Fed rate cuts this year, with stocks sliding over the past week as markets repriced their expectations. Investors are now expecting just one or two cuts in 2024, according to the CME FedWatch tool, down from six cuts priced in earlier this year.