Fundstrat’s Tom Lee gained attention a year ago with his bold prediction that the S&P 500 would experience a more than 20% surge in 2023, reaching 4,750 by year-end. At the time, skepticism prevailed due to the lingering effects of a harsh bear market throughout 2022. However, Lee’s forecast has proven to be remarkably accurate, with the S&P 500 currently hovering around 4,785, within 1% of his initial 2023 target. Among the strategists tracked by Bloomberg, Lee’s projection came closest to the actual S&P 500 performance.
Looking ahead to 2024, Lee anticipates another positive year for the stock market, setting a year-end S&P 500 target of 5,200, reflecting a potential 9% upside from current levels. In his recently released 2024 outlook, Lee outlines key factors driving his optimistic forecast.
1. Easing Financial Conditions: The easing of financial conditions throughout 2024 is identified as a pivotal factor driving further gains in the stock market. With the Federal Reserve signaling a higher likelihood of interest rate cuts rather than hikes, the market is pricing in at least five 25-basis-point cuts in the coming year. Lee emphasizes that falling interest rates, along with lower mortgage rates, could stimulate the housing market. Additionally, declining inflation may contribute to looser financial conditions, boosting consumers’ real incomes and purchasing power.
2. Corporate Earnings Growth: Lee projects robust earnings-per-share growth for the S&P 500, anticipating an 11% increase in 2024 to $240 and an 8% growth to $260 in 2025. This growth is primarily attributed to a cyclical recovery in profits, driven by the rebound in corporate capital expenditures (capex). Lee suggests that easing financial conditions will facilitate capex recovery, while improved GDP growth in Europe and Asia will contribute to a global economic upswing. A weaker US dollar and increased productivity are expected to further support corporate profits in 2024.
3. Stock Valuations: Lee predicts an expansion in price-to-earnings (P/E) ratios in 2024, moving towards 20x. Contrary to arguments for valuation compression, Lee points out historical data indicating that higher P/E ratios are realized when yields are between 3.5% to 5.5%. With yields in the 4% to 5% range, the instances of P/E ratios exceeding 18x reach 65%. The 2024 S&P 500 target of 5,200 is based on applying a 20x earnings multiple to Lee’s 2025 guidance of $260 per share.
4. Best Investment Ideas: Lee identifies small-cap stocks as his top idea for 2024, anticipating a potential catch-up rally of over 50% compared to the broader market. Additionally, he favors stocks in the financials, industrials, and technology sectors.
In summary, Tom Lee’s positive outlook for 2024 is grounded in expectations of easing financial conditions, strong corporate earnings growth, expanding stock valuations, and specific investment opportunities in small-cap stocks and selected sectors.
