Falling Inflation Still Points to 20% Gain in Stocks Despite Hawkish Powell

  • Stocks are still set for a 20% gain this year thanks to falling inflation, Fundstrat’s Tom Lee said.
  • Lee made the case for a rally despite Powell’s hawkish testimony before Congress on Tuesday.
  • Markets were expecting higher rates, but inflation expectations were unchanged, which is good news for stocks.

The rally in stocks will not be derailed by a hawkish Federal Reserve, as falling inflation still points to a 20% gain for the market this year, according to Fundstrat’s head of research Tom Lee.

In a note on Wednesday, Lee reiterated his bullish view on stocks despite Fed Chairman Jerome Powell’s hawkish testimony before Congress on Tuesday. The top central banker warned that rates would likely need to continue rising, prompting investors to raise their expectations for a 50 basis point rate hike in March and spur selling in stocks.

Already, central bankers have raised interest rates 450 basis-points to tackle rising inflation, a move that weighed on stocks last year and sent the S&P 500 down 20% .

But the hawkish comments haven’t changed the overall trajectory of stocks this year, Lee said, because inflation is still lower, which is more important for equities.

“This testimony doesn’t really change anything because the Fed’s actual path is a function of what happens with inflation,” Lee said. “The future path of inflation is, of course, not yet known but the main indicators show future growth is in the works.”

Fed officials flashed hawkish signals after seeing hot January inflation indicators, such as new payrolls, beat economists’ expectations. But that data is likely skewed by delays in official statistics, Lee said. More timely numbers, such as data from job listing sites such as Linkup and Indeed, show nearly a million fewer job openings than the official job report — a a sign that the economy is starting to cool down from the Fed’s aggressive monetary policy.

Meanwhile, six- and 12-month inflation expectations actually fell after Powell’s testimony, a sign markets still expect inflation to continue on its downward path.

Falling inflation should stop market volatility, which has historically led to positive returns for stocks, Lee said. He predicts the CBOE Volatility Index will trend below 20 this year, which could cause stocks to gain another 20% from current levels.

Lee has been bullish on equities for months, and previously predicted the S&P 500 would retest an all-time-high in 2022, though the stock index actually closed the year 20% lower. He made the case that stocks would see their strongest rally of the year through March and April, and urged investors to buy declining equities.

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