A top Wall Street strategist says the S&P 500 may be running on far more powerful fuel than the consensus believes, and the setup could carry stocks into uncharted territory before year-end.
In a new CNBC interview, Fundstrat’s Tom Lee says investors are misreading market sentiment and underestimating the current earnings and macro setup.
According to Lee, the American Association of Individual Investors (AAII) survey shows that investor sentiment is at a level that resembles bear markets of the past.
“Well, maybe some of the bears have gone to hiding… If you take AAII, which I think is one of the best surveys of high-net-worth retail investors, it’s averaged minus 11.7 this year… There have only been three other times in that survey’s 35-year history where the year-to-date average has been negative. It was 1990, 2002 and 2022. All those times have actually been associated with bear markets. And so sentiment has averaged this year what is consistent with a bear market.”
Lee believes that negative market sentiment will serve as fuel for more rallies.
“So it is the most hated V-shaped rally. Now, there may be some people who say they’re no longer bearish, but their P&L doesn’t reflect that.”
Turning to fundamentals, the Fundstrat executive says corporate earnings strength — especially margin expansion tied to AI adoption — remains underappreciated.
“Margins have been improving despite tariffs. And so it’s showing you that companies, I think, using AI are able to expand profit margins. That’s actually a pretty good tailwind because the tariff headwinds are fading, but the benefits from AI margin benefits are still going to grow.”
He also cites macro signals from the Federal Reserve and recent inflation data as another tailwind for risk assets.
“When you look at the CPI report in September, it was the highest percentage of components, 54%, that were in outright deflation. So in fact, inflation is falling like a rock.”
Lee notes that the Fed’s tone has shifted enough to keep investors leaning bullish as the labor market cools.
“And the second was he acknowledged that rates aren’t accommodative. They’re just less restrictive. And so, in a case where there’s falling inflation and if the job market is weakening, I think that that’s a good reason for cuts to happen, and in a way that’s good for equities.”
While Lee believes that the S&P 500 will surge to 7,000 this year, he thinks that the stock market index will enter a period of consolidation or chop in the first half of November.
Disclaimer: Opinions expressed at CapitalAI Daily are not investment advice. Investors should do their own due diligence before making any decisions involving securities, cryptocurrencies, or digital assets. Your transfers and trades are at your own risk, and any losses you may incur are your responsibility. CapitalAI Daily does not recommend the buying or selling of any assets, nor is CapitalAI Daily an investment advisor. See our Editorial Standards and Terms of Use.