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

Zinger Key Points
  • "I think we'll be well above the prior highs before the end of the year," Fundstrat's Tom Lee says.
  • If the S&P 500 closes out the year at 5,000, it would mark the strongest rally since the '90s.

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. 

Check This Out: A Stock Market Volatility Play Ahead Of Fed's Next Interest Rate Decision: This Fund Offers 1.5X Leverage

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:  from Flickr.

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