Markets were apprehensive ahead of last week's FOMC meeting, and Fundstrat Head of Research Tom Lee told clients that, based on the conversations he was having, many investors remained skeptical about equities as an asset class and expected the Fed to turn hawkish on Wednesday.
However, despite recent hotter-than-expected data, Lee argued that the Fed would acknowledge that inflation was still clearly on a downward trajectory, thus remaining dovish. He asserted that the market would rally on this news, as it became clear that consensus pre-meeting sentiment and expectations were incorrect.
This is exactly what happened. The latest SEP showed that members still expect three rate cuts for 2024 (as shown in our Chart of the Week). Markets immediately rallied in response, with the S&P 500 breaking the 5,200 mark for the first time and closing at a new all-time high Wednesday and again on Thursday. Can this continue?
Lee thinks it's possible, suggesting that the March 20 FOMC meeting will ultimately convince the market that the Fed remains dovish. Looking forward, he suggested that “once this happens, a lot of things can happen – all of them arguably good for stocks.” In his view, perceptions of a dovish Fed will result in easing financial conditions, expansion of market breadth, and improved CEO confidence.
Lee also pointed out that the technicals appear to be in place for markets to continue rallying, citing the work of Fundstrat Head of Technical Strategy Mark Newton. At our weekly research huddle, Newton elaborated on this: “I hear a lot of people who are saying, ‘the market’s overextended,’ or ‘the market’s overbought’. And it’s true that the S&P 500 has made an extraordinary move, up over 26% since October, but much of that has been large-cap Tech.”
He continued, “I think many of those skeptics would be surprised to learn that, on an equal-weighted basis, a breakout has literally just started. We’re seeing a broadening out in the market that is actually quite healthy – rotation out of Technology, which has underperformed the last month, into Energy and Materials, and we’ve already seen Financial and Industrials performing well. This is actually very constructive for the market. That’s why, in my view, we have to be in the market and not be concerned about how overbought the S&P and QQQ have gotten of late.”
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