According to Tom Lee of Fundstrat, the release of the July CPI figure on Thursday should lead to a significant stock market rise. While Fundstrat anticipates the CPI report to come in under target at 0.15%, the core CPI is predicted to be 0.22%.
According to Lee, “the primary driver is still the drag on CPI caused by the decline in used car prices.” Following the release of the July CPI report on Thursday, investors should anticipate a “sizable rally” in the stock market, according to Tom Lee of Fundstrat.
However, Fundstrat’s data science team predicts that inflation will undershoot to just 0.15%, which equals an annualized rate of 1.8%, barely below the consensus prediction of Core CPI of 0.22%.
Lee’s positive prediction is noteworthy in light of the fact that he previously forewarned investors of a short-term stock market sell-off owing to weak seasonality in August along with the flashing of a technical sell signal. The S&P 500 has dropped by as much as 2.5% since that warning.
The July CPI report, however, may act as the impetus for a recovery in stock prices because it may confirm that the Fed has completed its cycle of interest rate hikes.
“We think a positive surprise versus consensus of +0.15% would be… The biggest factor continuing to push down the CPI is the decline in used automobile costs, according to Lee.
Moody’s downgrading a number of regional banks in response to the possibility of a recession and unsettling economic statistics out of China that indicated a return to deflation are among the “tape bombs” Lee spoke to.
Lee thinks a July CPI data that was lower than anticipated would be more than sufficient to trigger a stock market surge that would fully make up for the losses sustained since the month’s beginning. The S&P 500 would rise by at least 2% as a result of such a surge.
Housing And Vehicle Pricing Went Up
Inflation has increased by 66% since the end of 2019 due to increases in vehicle and housing prices, which contributes to Lee’s optimism for a lower CPI figure. However, the price hikes for housing and autos have significantly abated recently.
“Investors fail to recognize the significant contributions that housing and used automobiles make to inflation. Additionally, as these components cool, the remaining components won’t necessarily trigger a new uptick in core inflation overall, according to Lee.
The fact that investor mood has deteriorated during the one-week stock market fall is another factor supporting the likelihood of a stock market rally following the July CPI report.
“Investors appear to have already grown much more cautious, which is positive for sentiment. Equities also appear to be oversold. Therefore, we believe there is a substantial likelihood that stocks will rise sharply following the CPI, said Lee.