Fundstrat’s Tom Lee anticipates that the unveiling of the July CPI report on Thursday will ignite a significant surge in the stock market.
While the consensus projects Core CPI to reach 0.22%, Fundstrat envisions the CPI report falling short at 0.15%.
Lee emphasized that the main influencing factor continues to be the downward pressure on CPI caused by the decline in prices of used cars.
Anticipate a substantial surge in the stock market subsequent to the release of the July Consumer Price Index (CPI) report on Thursday, as indicated by Tom Lee of Fundstrat. According to him, the consensus projections point to a Core CPI of 0.22%. However, Fundstrat’s data science team anticipates a more conservative inflation figure of 0.15%, equating to an annualized rate of 1.8%. This projection falls just shy of the Federal Reserve’s targeted long-term inflation rate of 2%.
Tom Lee’s optimistic prediction holds significant weight, especially given his recent cautionary note to investors a little over a week ago. At that time, he warned of a potential short-term downturn in the stock market due to unfavorable seasonal trends in August, coupled with the emergence of a technical sell signal. Since issuing that warning, the S&P 500 has experienced a decline of up to 2.5%.
However, the July CPI report might serve as the triggering factor to ignite a recovery in stock prices, potentially cementing the notion that the Federal Reserve has concluded its phase of raising interest rates.
“We anticipate that a +0.15% figure would bring about a favorable surprise compared to consensus… The main factor behind this is the decline in CPI attributed to the decrease in used car prices,” Lee remarked. “From our perspective, this positive surprise should sufficiently counterbalance the disruptive ‘tape bombs’ that unsettled the markets on Tuesday.”
Tom Lee’s mention of these “tape bombs” encompasses Moody’s decision to downgrade a series of regional banks due to the potential threat of a recession, along with concerning economic indicators from China indicating a resurgence of deflation.”
Lee envisions that a less heated July CPI report could serve as a catalyst for a robust stock market rally, reclaiming all the losses sustained since the month’s commencement. Such an upswing could translate into a substantial 2% upward movement in the S&P 500 index.
Lee’s assurance in the likelihood of a milder CPI report is grounded in the realization that, since the close of 2019, the escalation in inflation has been predominantly driven by a significant 66% contribution from automotive and housing costs. Nevertheless, these price hikes in both vehicles and shelter are now undergoing notable moderation.
“Investors often underestimate the disproportionate role that used cars and housing play in driving inflation. As these elements subside, the remaining factors will not necessarily trigger a renewed surge in overall core inflation,” Lee explained.
Adding to the potential for a stock market rally subsequent to the July CPI report is the recent shift in investor sentiment, which has soured due to the week-long descent in the stock market.