Stock market outlook: 6 reasons why stocks bottomed in October and will rally

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Traders work on the floor of the New York Stock Exchange (NYSE) on October 27, 2022 in New York City.
Spencer Platt/Getty Images

  • Fundstrat’s Tom Lee says it looks increasingly likely that the stock market bottomed in October.
  • Fundstrat highlighted six reasons why it thinks the bottom is in and a rally in stocks can continue.
  • “Markets bottom before fundamentals 80% of the time and S&P 500 P/E (2024) is 15x ex-FAANG,” Lee said.

Fundstrat’s Tom Lee has growing confidence that the stock market already bottomed in October and is poised for more gains ahead.

In a Thursday note to clients, Lee made the case that investors remain too pessimistic and should get on board with the idea that a new bull market has started, especially given that equity valuations are not stretched.

“Markets bottom before fundamentals 80% of the time and S&P 500 P/E (2024) is 15x ex-FAANG,” Lee said. “This is hardly expensive. In fact, among the most expensive sectors are defensives like Staples (19.6x), Utilities (17.5x), and Healthcare (16.7x).”

That’s not the only reason why Lee sees more upside for stocks.

These are the six reasons why the stock market already bottomed in this bear market cycle and is poised to continue to rally towards Lee’s 2023 year-end S&P 500 price target of 4,750, according to the note.

1. “Inflation Peaked.”

Date: June 2022
Rationale: During three prior bear markets, equities bottomed when CPI peaked, according to Lee. Inflation hit an annualized peak of 9.1% in June 2022, compared to 5% last month.

2. “High-yield spreads peaked.”

Date: July 6, 2022
Rationale: “High-yield [bond] spread peaks lead equity bottoms. High-yield option adjusted spread has not made a new high, confirming July 6 was the low,” Lee said. An index of high-yield bonds have jumped 7% from their 52-week low and are up just over 2% year-to-date.

3. “Rule of 1st five days.”

Date: January 5, 2023
Rationale: “Since 1950, the 7 precedent instances of a negative prior year and the first five trading days gain[ing] more than 1.4%, seven out of seven times markets [were] higher,” Lee said.

When the S&P 500 was up more than 1% in the first five trading days of the year, like it was this year, stocks finished the year higher 87% of the time, with an average gain of 15%.

4. “Two consecutive quarters of gains.”

Date: March 31, 2023
Rationale: “Since 1950, this has never happened in a bear market,” Lee said.

When the S&P 500 posted back-to-back quarterly gains of at least 5%, like it did the last two quarters, the stock market was higher the next year 87% of the time, with an average gain of 13.5%.

5. “More than 15 weeks above 200-week moving average.”

Date: February 14, 2023
Rationale: “Since 1950, 12 instances and never a single instance markets made a new low,” Lee said, referencing the fact that the stock market has traded above its 52-week moving average for about six months.

6. Investor sentiment is overly bearish.

Date: January 12, 2023
Rationale: Lee highlighted that the difference between bullish responses and bearish responses in the AAII weekly investor sentiment survey hit an extreme low earlier this year. “Only third time since 1987” this has happened, according to Lee. The last time it has happened was in 1991 and 2009, which both occurred after a major market low.

“Pick your poison. We see new bull,” Lee said.

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