Fundstrat’s Tom Lee says the stock market is entering a powerful setup for a year-end surge after a difficult stretch for investors.
In a new CNBC interview, Lee notes that institutional pain is unusually deep this quarter, creating conditions for a fast reversal following a minor capitulation period.
He says the sell-off now collides with historical trends that have favored bulls.
“I think we are set up for a really strong rally into year-end. And I know we just came out of a pretty terrible grind. I have talked to a lot of PMs (portfolio managers) that have said it is one of their worst six-week periods ever in their careers. So we know people have lost money, they have de-risked.
But we know into year-end, we have the positive seasonals, especially given how strong May to October was. It is really a five to six chance that we are gonna be up 5% into year-end.”
Lee also highlights a shift in policy dynamics as an emerging dovish bloc inside the Federal Reserve gains influence even as Chair Jerome Powell maintains a cautious tone.
“The second is monetary policy, I think it’s gonna shift dovish. Even if Fed Chair Powell is hawkish, we know waiting in the wings is now a shadow Fed that’s dovish.”
Data from the Fed Watch Tool shows that there’s an 84.7% chance the Fed will cut rates by 25 basis points in December.
Lee adds that sentiment will likely chase strength because most professional investors have fallen behind their benchmarks, leaving them with little choice if the market turns higher.
“We know sentiment is going to have to chase this rally, because 80% of fund managers are trailing their benchmark.”
As of Wednesday’s close, the S&P 500 is trading at 6,812, inching closer to Lee’s year-end target of 7,000.
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