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Even if the rate cut is smaller than the market initially expected, stocks could continue to do well this year.
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Fundstrat’s Tom Lee predicted the S&P 500 index could rise to 5,700 by the end of the year.
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He said he expects stock prices to rise due to a strong economy and generally slowing inflation.
Tom Lee, head of research at Fundstrat, said a decline in expectations for Fed rate cuts would not necessarily derail the stock market’s upward trajectory for the rest of the year.
Lee, one of Wall Street’s most bullish forecasters, predicts the S&P 500 could jump to 5,700 by the end of the year, suggesting the benchmark index could rise another 13%. In a recent interview with CNBC, he said that assuming the economy remains strong and inflation continues to fall, a Fed rate cut is not necessary for markets to do well.
The economy appears to be meeting these conditions for now, Lee added. Corporate earnings look solid, with the S&P 500 on track to post at least 7% profit growth this quarter, according to FactSet. Economic growth continues to be strong, with the Atlanta Fed’s estimates predicting economic growth of 2.9% in the first quarter.
And although headline inflation was higher than expected in March, most components of the consumer price index actually recorded annual inflation rates of around 2%, in line with the Fed’s long-term goal. Lee said the annual rate of inflation, which does not take into account the prices of cars, housing, energy and food, was measured at 2.7% last month, suggesting that inflation is cooling overall.
“There’s really no need for the Fed to cut rates three times,” he added.
But the only risk looming for stocks is if inflation turns out to be higher than expected and the Fed decides to raise rates again, Lee warned.
“I think this is still very much a tail scenario, but it will be the one that is most destabilizing to the market,” he said.
Stocks have fallen over the past week as rising inflation prompted investors to backtrack on expectations for the Federal Reserve to cut interest rates this year and markets reassess expectations. Investors now expect only one or two rate cuts in 2024, down from six rate cuts priced in earlier this year, according to the CME FedWatch tool.
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