As the end of the year approaches, major Wall Street banks are generally optimistic about the trend of the US stock market next year. And on Thursday of this week, the most "resounding" bullish voices emerged
Fundstrat research director Tom Lee predicts that the S&P 500 index is expected to rise to 5200 points by the end of next year, an increase of about 14% from current levels.
He believes that the decline in US inflation will translate into a decrease in interest rates, and the relaxation of the financial environment will be faster than expected, which should boost corporate profits and stock market valuations.
It is worth mentioning that Lee's forecast target for next year's S&P 500 index is the highest among Wall Street strategists tracked by industry media so far, surpassing the previous forecast of 5100 points made by Deutsche Bank and Bank of Montreal Capital Markets.
In fact, Lee's forecast for the US stock market this year was relatively optimistic at the beginning of this year - he predicted that the S&P 500 index would rise to 4750 points (last closed at 4585.59 points on Thursday), which was also higher than market consensus.
The main reason Lee was optimistic about the US stock market at the time was that he believed the decline in inflation rate would exceed people's expectations, and the US economy would not fall into recession. Lee now believes that a similar situation will occur in 2024 as the market cheers on weak inflation data and signs of continued economic growth.
Lee stated that the US economy is "very likely" to avoid a recession in 2024, even if the labor market may be relatively "weak" in the first half of next year.
"2023 is the year that (stock market) technical analysts have seen right... while economists have seen wrong, 2024 may also be the same," Lee said at a roundtable on Thursday looking ahead to 2024.
What stocks are most bullish on?
The wider range of market gains is a key reason why Lee is optimistic about the performance of the US stock market next year.
Some of the popular industries and sector options he favors include small cap stocks, financial stocks, and real estate stocks. The financial and real estate industries have lagged behind the overall market for most of 2023.
In terms of the hottest technology stocks this year, Lee was already bullish on technology stocks a year ago. Despite the significant surge in technology stocks this year, he has not given up his bullish stance on the tech giants (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) in the US stock market, and has pointed out that their performance may continue to outperform the market.
But the uniqueness of Lee's latest view is that he believes that as the Federal Reserve lowers interest rates, small cap and financial stocks will perform better than the Big Seven.
Lee stated that compared to other companies, small cap stocks have more short-term debt and can benefit from lower borrowing costs, while finance and real estate will also benefit from interest rate cuts as mortgage interest rates may decrease simultaneously. He predicts that the interest rates on 30-year mortgages will decrease next year, the "suppressed demand" of American companies will be released, and the macro environment will be much better than in 2023.
"When it comes to positions, almost no one currently holds financial stocks... and few people are truly bullish on small cap stocks. However, it should be noted that they still have a lot of room for growth."
One of the main risks facing Lee's theory is that the US economy will fall into recession next year. But Lee pointed out, "Even so, the stock market may not be dragged down next year. This is not the real 'killer' because it means the Federal Reserve will also cut interest rates more. So you don't have to worry so much."