Tom Lee Predicts Historic Rally To 'Well Above' All-Time Highs: Why The S&P 500 Could Hit 5,000 In 5 Months

Fundstrat's Tom Lee is known for his bullish calls. He made another one this week in a big way. 

What Happened: Monday on CNBC's "Squawk Box," Lee predicted the S&P 500 will trade well above all-time highs this year. 

Lee shared that 4,505 is a "very important level" for markets because it represents a 76% Fibonacci retracement recovery from the 2022 highs.

"Now that we closed above it, I actually think the probabilities favor us going back to the prior highs ... 4,505 essentially becomes support now," Lee said. 

Last week, Lee made a "tactical buy" call on the market, calling for a 100-basis point rally on the back of cooler-than-expected CPI data. He ended up being right. The SPDR S&P 500 ETF Trust SPY, an ETF that tracks the S&P 500 index, is up more than 2.2% over the last week and more than 18% for the year.

"I think we'll be well above the prior highs before the end of the year," Lee said. "I think there's even a chance that we could be, you know, close to 5,000."

In order for the S&P 500 to reach the 5,000 level, a couple of things need to happen. It starts with strong earnings. There's a good chance that at least half of the index shows a return to earnings growth this quarter and that closer to 100% of the index shows earnings growth by the end of the year, he said.

Inflation also needs to continue to move lower, Lee said, adding he believed there is a good chance core CPI comes in at 0.2% or less in both July and August. 

He's not worried about the Federal Reserve. He's anticipating another 0.25% rate hike from the Fed at its upcoming meeting, which the market is already pricing in. According to CME Group's FedWatch tool, the market is currently pricing in a 97.3% chance of a 0.25% hike next meeting. 

The Fed could even opt to raise rates another 0.25% at the subsequent meeting and it won't hurt the market's chances for new all-time highs, Lee said. 

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He also noted there is $5.5 trillion in cash sitting on the sidelines, which is up close to $1 trillion from the start of the year. 

"So there is still a lot of skepticism," Lee said.

It remains to be seen if the market can reach new all-time highs in 2023, but it looks like a tough feat given that the S&P 500 is already up close to 19% this year. If Lee is right again and the S&P 500 rallies to around 4,825, it would be up more than 27% for the year after falling nearly 20% in 2022.

If the S&P 500 closes out the year at 5,000, it would be up more than 31%, marking the strongest rally since the '90s. The market was up 31.01% in 1997 and surged 34.11% in 1995. 

SPY Price Action: The SPY was up 0.47% at $452.95 at the time of publication Tuesday, according to Benzinga Pro.

Photo: Sam Valadi from Flickr.