Why This Market Strategist Sees 23% Gain For S&P 500 Index This Year: 'Volatility To Sink Sharply'

Fundstrat’s Head of Research Tom Lee, who has the most optimistic end-of-year S&P 500 forecast once again raised the specter of a strong year for the market.

What Happened: The first four days of 2023 have seen a gain of 1.4% by the S&P 500 Index. This is an omen for a strong 2023, which could see a gain of 23%, Lee said in the firm’s FS Insight report released on Monday.

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Investors worry Fed playing “whack-a-mole” with equities but if inflation tanks (with wages slowing), FCIs [financial conditions] will ease,” Lee said.

The consensus view is that stocks will fall in the first half to 3,000 and then recover to end the year flat, the analyst noted.

Stocks are rarely flat after a negative year and are far more likely to rise more than 20%, he said. Volatility, the analyst said, matters more than the earnings per share and Fed is the key.

“We see roadmap for volatility to sink sharply in 2023, [which] already happened with bonds,” he added.

Since 1950, a gain of 1.4% or more has happened in the first four trading sessions 23 times, another insight shared by Fundstrat showed.

The median gain for the full year of those years was 17%, it said. Twenty of those 23 years saw gains, suggesting 87% win ratio, it added.

Why It’s Important: The S&P 500 ended 2022 with a loss of 19.44% as traders were unnerved by multiple headwinds, including a war in eastern Europe, aggressive fed funds rate hikes and slowing corporate profit growth. The sell-off, spearheaded by tech stocks, has rendered valuations attractive.

Red-hot inflation that was driving the Fed toward rate hikes has shown signs of cooling off, although pricing pressure is still above Fed’s target. Then, there is the recession threat as the economy begins to fully reflect the cumulative impact of multiple big rate hikes announced in 2022.

Market strategists’ average year-end 2023 price target for S&P 500 Index is 4,140, with the highest and lowest estimates at 4,575 and 3,725, respectively, according to data compiled by CNBC. The CNBC database, however, doesn’t include Fundstrat’s estimate.

Price Action: The SPDR S&P 500 ETF Trust (SPY), which is an exchange-traded fund tracking the performance of the S&P 500 Index, fell 0.06%, to $387.86, on Monday, according to Benzinga Pro data.

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