• Subsequent week is essential for the inventory market as buyers brace for CPI knowledge and a Federal Reserve assembly.
• Fundstrat’s Tom Lee mentioned a low inflation studying might increase shares as it might bolster a Fed pause in rate of interest hikes.
• “Our view stays that inflation is monitoring decrease than consensus,” Lee mentioned.

Subsequent week is without doubt one of the most crucial weeks for the inventory market this 12 months as buyers brace for a Federal Reserve rate of interest choice that might convey a pause in price hikes and new CPI inflation knowledge. 

Fundstrat’s head of Analysis Tom Lee mentioned that as shares enters a brand new bull regime,  the market might get jolted by volatility relying on how the brand new inflation knowledge shakes out and the way the Fed reacts to that knowledge at its coverage assembly on June 13-14. 

With market consensus anticipating the core month-over-month inflation gauge to be 0.4% for the month of Might, buyers could be shocked if inflation got here in nearer to 0.3%. That may be a constructive shock as a result of it might bolster the Fed’s potential choice to pause rate of interest hikes this month and in July. 

“If Might Core CPI [is less than] 0.4%, then we see these odds [of interest rate hikes] dropping to zero for every month,” Lee mentioned in a Friday notice. 

Lee is assured that inflation is certainly monitoring decrease than consensus primarily based on real-time measures of CPI, and that inflation is definitely nearing the Fed’s long-term goal of two%.

“If this performs out, the Fed’s pause will morph into an information dependent mode, the place the bar is raised for additional [interest rate] hikes,” Lee mentioned. “We anticipate buyers to see this as a inexperienced gentle for dangerous property, which suggests fairness buyers is not going to be combating the Fed.”

But when the Fed strikes forward with elevating rates of interest once more, buyers needs to be prepared to purchase a probable decline in shares, in keeping with Lee.

“Even when the Fed raises charges a number of extra instances in 2023, to us, the bottom line is whether or not that is in response to rising inflationary pressures. And our view is that these pressures are diminishing,” Lee mentioned. 

Bolstering Lee’s bullish case is the truth that market breadth is starting to develop, which is a wholesome signal for the sustainability of the present rally. In different phrases, increasingly more shares are starting to take part within the upside, relatively than the rally being drive by only a handful of mega-cap tech shares.

“Market breadth is notably bettering,” Lee mentioned, pointing to the outperformance of small-cap shares this week. “Nonetheless wish to purchase dips as market breadth increasing.”

Lee continues to advocate buyers keep obese to the industrials and regional financial institution sectors, and he reiterated his 2023 year-end S&P 500 value goal of 4,750, representing potential upside of 10% from present ranges.

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