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Fundstrat’s Tom Lee recommends buying the continued dip in stocks despite troubling economic data.
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Technology stocks have fallen lately due to disappointing earnings and volatility in the chip sector.
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Lee says upcoming Fed guidance and possible rate cuts could move markets in a positive direction.
It’s an excellent time for investors to do that buy the dip in stockswith the market showing a handful of signs that more upside is on the way, according to Tom Lee, head of research at Fundstrat.
The ultra-bullish analyst, who previously called the The S&P 500 could nearly triple by the end of the decade, says the continued technology-driven stock sale is actually a buying opportunity.
It’s a bold call for the short term, given the recent market mess. The tech-heavy Nasdaq 100 has lost nearly 5% in just two days disappointing profits reports and volatility in the chip sector.
Lee says the sell-off was likely fueled by a confluence of factors, including uncertainty surrounding the presidential election, ongoing geopolitical tensions and lingering concerns about a recession.
But there are signs that the sell-off will ultimately be limited, said Mark Newton, the company’s chief strategy officer.
“Overall, it’s still hard for me to give too much credit to Thursday’s price action because it ‘changed the trend’ or ‘broke a trend’ and the uptrends remain intact,” Newton said, pointing to a technical support level of 5,390 for the S&P 500. “I bet tech has bottomed out too, and I can’t get too negative after this pullback.”
Lee also outlined four reasons why markets were likely experiencing a “normal downturn,” as opposed to investors panicking about the risk of a possible recession.
1. Stocks have some catalysts ahead
Central bankers are expected to provide more guidance on rate cuts in the weeks after their latest policy meeting. That could move markets in a more positive direction, Lee said, if Fed officials hint at a rate cut coming soon.
Inflation figures for July, meanwhile, will be published on August 11. Cooling inflation could also boost confidence in rate cuts, which could boost equity markets.
“This is likely to allay concerns that the Fed is making a mistake,” Lee added.
The markets are quite optimistic about interest rate developments later this year. Investors have priced in with certainty that the Fed will start cutting rates in September, and that central bankers could cut rates by 100 to 125 basis points by the end of the year, the report said. CME Fedwatch tool.
2. Technical signals indicate that the downsides are limited
There isn’t much evidence that underperforming parts of the market, such as small-cap stocks, have peaked, Newton said. Meanwhile, Treasury yields have fallen in recent months as traders anticipate Fed rate cuts, which is generally bullish for stocks, he added.
“So looking for dips makes technical sense,” he said, adding that small-cap stocks were “certainly looking attractive” after their recent decline.
3. Fed rate cuts will mark a turning point in the market
That’s because interest rate cuts are expected to ease borrowing costs across sectors. Certain types of debt, such as variable-rate mortgages and car loans, are financed below short-term rates – meaning these sectors are “positively affected” by rate cuts, Lee added.
4. Small-cap stocks are sending bullish signals
The Russell 2000 hit a 30-month high in July, something that has happened only nine times in the past 45 years. In all cases, the index was higher three months later, Lee noted.
The index has also seen small moves, gaining or losing less than 1% in 11 of the past 12 trading days. That has happened only 10 times in the past 45 years, and in all cases the index was higher six months later, he added.
Fundstrat is currently among the most bullish companies on Wall Street. Recently, Lee called for one 40% increase in small caps stocks, thanks to a slew of positive signs among small-cap companies.
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