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Tom Lee

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  • The inventory market is primed for sturdy returns within the second half as inflation reveals indicators of cooling, based on Fundstrat’s Tom Lee.

  • That is regardless of a scorching CPI print in Might, which confirmed inflation rise 8.6% year-over-year as fuel costs surge.

  • “We persist with our view that shares strengthen in 2H and even revisit prior highs,” Lee stated.

The inventory market is poised for a powerful second half of the 12 months as inflation reveals indicators of cooling down, Fundstrat’s Tom Lee stated in a notice on Friday.

That is regardless of Friday’s scorching CPI report, which confirmed inflation rose 8.6% year-over-year within the month of Might, nicely forward of estimates for an increase of 8.3%. That represents the quickest tempo of US inflation in 41 years.

The CPI report illustrates that inflation could not have but peaked as markets had hoped, as oil costs proceed to march greater, and that the Federal Reserve could have to boost rates of interest greater than anticipated to tame greater costs. The market at the moment expects the Fed to boost rates of interest by 0.50% at every of its subsequent two conferences.

However none of that’s budging Lee’s view that shares may revisit its prior highs by the tip of the 12 months, based on the notice.

“We persist with our view that shares strengthen in 2H and even revisit prior highs,” Lee stated. A part of Lee’s confidence stems from the truth that sure commodities and financial exercise are weakening sooner than anticipated, which ought to assist put a lid on rising costs and provides the Fed some respiratory room of their price hike trajectory.

These are a number of the indicators Lee is taking a look at as an indication that inflation will start to cooler sooner than anticipated.

1. “US Mortgage purposes plunged to lowest degree in 22 years… this portends a twin hit to dwelling costs (unfavorable shock) and presumably [a] 60% drop in mortgage banking employment,” Lee stated.

2. “Fertilizer costs are down 34% from peak,” Lee stated.

3. “There are indicators that corn, cattle and wheat costs is likely to be plateauing,” Lee stated.

4. “World provide chain strains appear to be easing… this factors to doable accelerated declines in items pricing,” Lee stated.

5. “Oil stays elevated, however oil is changing into a barometer for the Russia-Ukraine battle and so long as hostilities escalate, oil is greater. However that is considerably binary. Cessation of hostilities doubtless dramatically impacts inflation perceptions,” Lee stated.

All-in, these knowledge factors counsel to Lee that the inventory market has already discounted a development scare within the financial system given its sell-off of as a lot as 20%, and that solely a tough financial touchdown would justify additional draw back, based on Lee.

One doable signal of “inexperienced shoots” traders ought to monitor to substantiate if shares may have a powerful second half of the 12 months is that if the Nasdaq 100 and Chinese language shares outperform the broader market, as that has beforehand helped traders determine bottoms available in the market.

“Each indices wouldn’t carry out nicely if inflation dangers are rising. Nor would these outperform if the worldwide financial system was headed for a ‘onerous touchdown,” Lee stated.

The Nasdaq is barely outperforming the S&P 500 from the Might 24 low, however that outperformance is slipping on Friday due to its sharp decline of greater than 3%.

Learn the unique article on Enterprise Insider

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