S&P 500 to break 8,800 by year-end?...Tom Lee: "20% drop in Q3 first"

▲ U.S. Stock Market, Dow Jones/AI Generated Image

Wall Street bullish sentiment suggests that the S&P 500 Index (SPX) could exceed 8,000 this year, potentially reaching as high as 8,800. However, a warning was also issued that a sharp correction, which could include a 20% drop, might hit the stock market between August and October.

Tom Lee, CEO of FundStrat, predicted in an interview with CNBC on July 6 (local time) that the U.S. stock market would show stronger performance in July than in June. Lee explained that the first-quarter corporate earnings significantly exceeded market expectations, leading to the current market's price-to-earnings (P/E) ratio being 1.1 times lower than in January. He stated, "I expect second-quarter earnings to also be stronger than anticipated again," adding, "The market will become cheaper again, and there will be room for the P/E ratio to increase."

The year-end outlook for the S&P 500 Index is even more aggressive. When asked about the possibility of the S&P 500 Index reaching 8,000, Lee responded affirmatively, explaining that based on corporate earnings of 400, an index of 8,000 would correspond to a P/E ratio of approximately 20 times. He continued, "I think the earnings forecast of 400 itself is a low estimate," adding, "The P/E ratio could go above 22 times, opening up a year-end upside range of 8,400 to 8,800."

Another basis for the July bullish forecast is the underperformance of fund managers. The percentage of fund managers who outperformed the large-cap growth index this year was only 23%, falling to its lowest level in about five years. Lee predicted that fund managers who failed to keep up with the benchmark index would actively buy during July's stock price declines, thereby supporting the market.

However, he also warned of the possibility of a rapid shift in market sentiment between August and October. Lee stated that the market could experience a shock during this period that "could feel like a bear market," and when asked about the possibility of a 20% drop, he replied, "It's possible." He explained that although the decline from February to April this year was only 7%, it felt like a bear market to investors.

Risk factors for the second half of the year include the Federal Reserve's (Fed) new monetary policy framework, its method of assessing inflation, and the gradual release of SpaceX (SPCX) shares. Lee believed that July's earnings and bargain hunting could drive the market higher, but emphasized that variables remain to test the market on its way to year-end.

[Article Key Summary]

-A forecast suggests that the S&P 500 Index could rise to 8,400 to 8,800 by year-end, driven by strong second-quarter corporate earnings and potential for P/E ratio expansion.

-Only 23% of fund managers outperformed the large-cap growth index this year, leading to an analysis that bargain hunting in July could support the stock market.

-Tom Lee did not rule out the possibility of the market feeling like a bear market between August and October, with a potential 20% drop.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*