The stock market is only getting stronger as inflation falls and the Fed stops worrying about the labor market, Fundstrat’s Tom Lee says

• The stock market is still strengthening, according to Fundstrat’s Tom Lee.
• Lee pointed to falling inflation and the resilient job market, which should support gains for stocks. 
• Lee said he’s considered raising his S&P 500 price target to 5,500, implying 11% upside from current levels.

The stock market is only getting stronger this year, according to the strategist who nailed his 2023 stock market outlook.

Fundstrat’s head of research, Tom Lee — who correctly called the S&P 500’s 24% gain last year —pointed to the resilience in stocks so far in 2024 as inflation cools and the Federal Reserve appears less alarmed about the stunning strength of the US labor market. 

Stocks have gained so far in 2024, but the market has been on edge over the ability of corporate earnings to continue meeting investors’ expectations, as well as the timing of rate hikes from the Federal Reserve. 

In its meeting last week, the central bank indicated that it doesn’t expect to trim interest rates until officials are more confident inflation is getting back to the Fed’s 2% target, a sentiment Fed Chair Jerome Powell reiterated in an interview with “60 Minutes” on Sunday. 

Still, the important thing for stocks is that the Fed is turning dovish, and the exact timing of rate cuts isn’t that important, Lee said. 

“The stock market should really just care that the Fed has gone from fighting inflation and almost giving the economy a heart attack to one where they try to manage the business cycle,” Lee said in an interview with CNBC on Friday. “So if they don’t feel comfortable doing this cutting in March instead of May, I don’t think it should have any effect on equities and how they do today.” 

Prices have come down without causing a notable spike in unemployment, which is good news for the economy. Unemployment has stayed near a historical low, clocking in at 3.7% in January, and the Fed appears to be less concerned about the continued jobs strength. 

“The labor market remains tight, but supply and demand conditions continue to come into better balance,” Powell said at last week’s press conference following the FOMC meeting. 

“The unemployment rate is not falling precipitously and it’s not creating a lot of wage pressure. So far, I think the labor market isn’t going to be a source of concern for the Fed,” Lee said. 

He also notes that investors also have a lot of cash sitting on the sidelines, with $6 trillion in cash currently in money market funds, according to the Investment Company Institute. That stockpile has the potential to serve as dry powder to fuel more stock gains. 

Lee has forecast the S&P 500 to notch a new record in 2024. The benchmark index could reach 5,200 by the end of the year, Lee predicted. Recently, he said he’s considered raising his year-end price target to 5,500, implying an 11% increase from the index’s current levels.