Spencer Platt/Getty, Tyler Le/BI
The Federal Reserve's rate decision will jumpstart a strong market move into year-end, and even hawkish comments from the central bank will allow investors to emerge from a "zone of hesitation," according to one of Wall Street's most bullish forecasters.
Tom Lee, the head of research at Fundstrat, sees stocks jumping after the Fed's rate decision Wednesday afternoon, kicking off a year-end market rally.
That's because investors have been locked in a sideways trading pattern in anticipation of the December rate decision, and moving past the event should give stocks more runway to rally, he said.
The stock market could rise as much as 2% in the days following the Fed meeting, Lee added. He highlighted that over the last two years, the median gain for stocks in the five days leading up to and following a Fed meeting was 2%. Yet, the S&P 500 has only gained 0.3% over the last week, which could mean outlook is skewed to the upside.
"We believe the year-end rally likely starts post-Dec FOMC rate decision," Lee wrote in a note to clients. "Equities have been in this holding pattern, the 'zone of hesitation' that has been in place. And the finality of getting the rate decision behind us is the 'buy the news event.'"
Investors overwhelmingly expect the Fed to trim interest rates by 25 basis points at the conclusion of its policy meeting.
The outlook for next year is more uncertain, though. Markets see strong odds that the Fed will pause its rate-cutting cycle in January, the CME FedWatch Tool shows.
Investors are also growing more concerned about the pace of inflation. Consumer prices rose 2.7% year-over-year November, slightly hotter than the prior month annual increase of 2.6%.
But those factors shouldn't deter stocks from moving higher, Lee said. Stubborn areas of price growth in the economy, like auto insurance, are known to be "lagging indicators" of inflation, he said, citing previous comments from Fed Chair Powell.
Higher prices mean the Fed risks cutting interest rates less than expected next year, but shallower rate cuts could still result in a bullish scenario for stocks, Lee added, as it means the Fed will prolong its rate-cutting cycle, which is inherently positive for equities.
Stocks could also be boosted next year by expected deregulation under Donald Trump, lower borrowing costs for businesses, and animal spirits in the market, he added.
"We are now exiting the 'zone of hesitation.' But we would urge investors to buy this dip," Lee said.
Lee, who has remained bullish on stocks for the last several years, predicted the benchmark index could soar as high as 7,000 in the first half of next year, before ending the year at 6,600.
