Fundstrat anticipates a significant surge in the stock market, predicting a potential 5% increase in the next week, as highlighted in a Wednesday note. The firm projects a robust rally in the S&P 500 to unfold within the five days following the Federal Reserve's FOMC meeting this Wednesday.
While a cut in interest rates is not anticipated during the July FOMC meeting, the Fed is expected to signal a high likelihood of a rate cut at its September meeting.
"The key premise is that the Fed is likely to commit to a September rate cut of at least 25 basis points. While the bond markets have already priced in a 100% probability of this, equity investors may remain skeptical until the Fed confirms it," stated Tom Lee of Fundstrat.
The near certainty of a September rate cut by the Fed is expected to ignite a risk-on rally for stocks. This is particularly relevant as the Nasdaq 100 has already undergone a near-10% correction in recent weeks, according to Fundstrat’s note.
"Overall, we believe a risk-on moment is imminent," said Lee.
Lee's confidence in a robust rally following the Fed meeting is supported by historical patterns. Over the past two years, when stocks were down heading into a Fed FOMC meeting, they experienced gains of up to 5.5% within five days, with a median gain of 3.4%.
"These are significant gains, suggesting the S&P 500 could add 200-300 points in the coming week. We find this very compelling," Lee commented.
While a 25 basis point interest rate cut might seem modest, it has substantial economic implications, potentially influencing the US housing market significantly.
"Here are some tangible reasons why a Fed cut makes sense: the 30-year mortgage has an excessive spread to the 10-year due to uncertainty. The spread could decrease from 270 basis points to 170 basis points, which is the 50-year average," Lee explained.
Even a minor interest rate cut from the Fed could alleviate the ongoing slowdown in the housing, durables, and auto markets, Lee noted.
A 5% rally in the S&P 500 would propel the index to new record highs, effectively erasing its 5% decline from recent weeks.
