The stock market is headed for a tough 8 weeks but could see a 10% rally into year-end, Fundstrat's Tom Lee says

• The stock market is facing a challenging two months ahead, according to Fundstrat's Tom Lee.
• Lee said he remained bullish on stocks by the end of the year, despite potential near-term downside.
• He outlined six reasons stocks were still poised to notch a 10% gain in the second half.

The stock market is headed for a tough two months, but investors could still see a strong rally by the end of the year, according to one of Wall Street's most bullish forecasters.

Tom Lee, the head of research at Fundstrat, issued a rare bearish call for stocks in the short-run on Monday, predicting the next eight weeks could be difficult for investors. That's largely due to turbulence stemming from the upcoming presidential election, he said in a video to Fundstrat clients, pointing to the latest presidential polls, which show Harris and Trump remain neck-and-neck.

Stocks have dropped around 4% since the start of the month. Lee said equities could end up dropping as much as 7%, predicting the S&P 500 could bottom at as low as 5,350, slightly lower from that the benchmark index traded Monday morning.

But that shouldn't discourage investors who are still hoping for a strong year for stocks, he said.

"As much as the eight weeks are going to be challenging, I don't think we should lose sight of the full year, which I think is going to turn out to be quite strong," Lee said, outlining six reasons he believed stocks could rally as much as 10% at the end of this year:

1. The economy looks poised to avoid a recession

Despite fears surrounding an economic slowdown, the US economy remains on solid footing, with GDP growing 3% in the second quarter.

The job market, meanwhile, held up as expected in the month of August, with the unemployment rate declining slightly to 4.2%.

"The soft landing is intact. I don't think we're barreling towards a recession," Lee said.

2. High-yield bonds rallied last month

That's a bullish signal for stocks, considering the general pattern of stocks relative to bonds since the start of September, Lee noted.

3. More stocks are gaining

The proportion of S&P 500 stocks that advanced over the number of companies that declined reached a new high in August. That's another bullish signal for stocks, which could suggest another market peak is on its way, Lee said.

Such was the case in 2007. That year, the S&P 500 advance/decline line reached a new high in May, just months before the overall index arrived at a fresh high.

"I don't think we should be saying the market is topped for the year," he added.

4. Nvidia's sell-off isn't unique

Investors have been spooked by the latest sell-off in Nvidia, the AI darling that's plunged around 20% from its peak in mid-August.

But that might not be an omen for the market that some investors think, considering Nvidia's historical drawdowns. Last month's sell-off marked the 21st time Nvidia dropped between 25%-30% over the last 25 years, Lee said.

5. Stocks are on a positive trajectory from the first half

Stocks have had a strong 2024 so far, with the S&P 500 gaining 10% over the first half of the year. Since 1950, stocks have been up 83% of the time in the second half after gaining 10% or more in the first half, with an average second-half gain of 10%, Lee noted.

"History already says we're going to finish this year strong," he said.

6. Investors may have already seen the election-year low.

Stocks may have already hit their trough this election year, a historically turbulent time for markets.

Though market volatility tends to peak in October of an election year, stocks tend to hit a low in August, Lee said, which means investors may already be through with the worst of their losses.

"So just keep that in mind. We're in a challenging eight weeks, but I think the August lows hold," Lee said.