Stock market could see ‘fireworks’ through the end of the year as headwinds have ‘flipped,’ Fundstrat’s Tom Lee says

Several headwinds that pummeled the stock market in 2022 have turned into tailwinds, setting the stage for a rally in U.S. equities heading into year-end, according to Tom Lee, head of research at Fundstrat Global Advisors.

“The Thanksgiving holiday has ended and now markets are entering the final key weeks of 2022,” said Lee, head of research at Fundstrat, in a note Monday. “While many may be tempted to ‘close the books’ for the year, we think the final 5 weeks will be ‘fireworks.’”

In Lee’s view, 11 headwinds that this year helped drive the S&P 500 index to a 2022 low in October, including surging oil prices and the Federal Reserve’s hurry to lift interest rates higher to battle soaring inflation, “have all flipped.” On Monday morning, U.S. oil was trading at the lowest price of 2022 amid protests in China over the country’s strict rules aimed at curbing the spread of COVID-19, restrictions that investors fear will hurt consumption and economic growth.

Lee said he saw the easing of inflation in October, as measured by the consumer price index, as a “game changer” for markets, with the case for “a sustainable rally in equities” being the strongest that it’s been so far this year. Here are the 2022 headwinds that Lee sees becoming tailwinds.

FUNDSTRAT NOTE DATED NOV. 28, 2022

Lee said that softer inflation seen in October appears “repeatable” and that the easing of price pressures should be “sufficient” for the Fed to slow its rapid pace of rate hikes, with December potentially being the last increase. Also, “if inflation is ‘as bad as 1980s’ I would have thought midterms would have been an incumbent massacre,” Lee said of the recent U.S. elections.

He said that other recent signals point to “a far different path forward for markets,” including “collapsing” volatility in the bond market and a relatively large decline in the U.S. dollar. Lee pointed to…

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