There’s gas in the tank for a post-Fed rally so stick with the stock-market winners, says Wall Street bull
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Fed day is finally here, and hopefully, the answer to burning questions about rate-cutting plans from the world’s most important central bank.
As we wait to see how the Fed’s words play out on Wall Street, our call of the day,is from the head of research at Fundstrat Global Advisors, Tom Lee, who says there will be a post-decision rally, offering five reasons for that.
One of Wall Street’s biggest and most enduring bulls, Lee correctly called the 2023 equity rally and sees the S&P 500 SPX ending 2024 at 5,200, which he has said may be too conservative.
Lee acknowledges pre-Fed investor caution, which he attributes to January’s red-hot inflation data and easing financial conditions. He also finds investors seemingly in disbelief that stocks continue to rise despite January’s hot CPI data, recession worries, extreme valuations, still dominant Big Tech and hype around AI.
So in order for stocks to rally, some kind of surprise or relief element would be needed, which he expects. In the first of his five reasons, Lee talks about how stocks have been easing just a bit into the Fed meeting, which puts the odds in favor of equity gains.
“When you look at the last two years worth of rate decisions, when stocks are soft into the FOMC, they rally four out of seven times. It’s not a high probability…but it just shows you that there are things that can improve the odds, but at least the base case is that it’s probable that we rally after the FOMC,” Lee tells clients in an update.
The second reason surrounds softening interest rates, which can work in equities’ favor. Fundstrat’s head of technical strategy Mark Newton sees the 10-year Treasury yield at a peak:
Thirdly, the market has already priced in “bad news” — three instead of seven interest rate cuts that may not start until September.
Fourth, Fed Chair Jerome Powell was dovish to Congress earlier this month, and the strategist sees no reason why he would shift that stance on Wednesday.
Finally, the “gas-in-the-tank,” reason and for that, Fundstrat’s Newton has laid out a bullish technical setup. “We find investors become reflexively bearish every time the market starts to wobble.?As long as ‘top calling’ remains the default mode, we think stocks are likely to continue to surprise to the upside,” says Lee.
Fundstrat sees the S&P 500 possibly reaching 5,250 to 5,300 in the aftermath of Wednesday’s meeting.
Lee says the “skepticism towards equities is still prevalent among institutional investors that we have visited with recently.?And this caution, coupled with their expectation of a ‘hawkish’ Fed is the reason we expect stocks to rally.”
As for where to invest, despite some recent wariness around Nvidia, Lee says investors should “stick with what is working” this year, such as the AI theme — Nvidia NVDA, 0.13%, Cadence Design Systems CDNS, 0.35%, Arm Holdings ARM, 2.57%, Advanced Micro Devices AMD, -0.40% and the Global X Artificial Intelligence & Technology ETF AIQ.
Also don’t shed those weight-loss linked stocks such as Eli Lilly LLY, -0.38% and Novo Nordisk NVO, -0.43% or financials via Industrial Select Sector SPDR ETF XLI and industrials via Financial Select Sector SPDR XLF. He also is sticking with bitcoin and its proxies — Marathon Digital MARA, 5.33%, PayPal PYPL, 1.09%, Coinbase COIN, 2.93% and MicroStrategy MSTR, 2.13%.
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