Stock Alert
Bull Tom Lee Advises Caution. Stocks Could Fall 7% or More.The investor and strategist also sees volatile times ahead for the market.
By
Jacob Sonenshine
Sept. 3, 2024 2:07 pm ET
Tom Lee.
Rob Kim/Getty Images for Yahoo Finance
The S&P 500 is up 7% since early August, punching back after an underwhelming jobs report and a tech rout dulled its momentum in July. Today, the index isn’t far from its record high—a level so frothy that even eternal optimist Tom Lee expects another drop.
Lee—he’s well known as the lead strategist at Fundstrat Global Advisors—has correctly predicted the market’s climb and is almost always bullish. So on Tuesday, when he warned that a little pullback is coming, Wall Street took notice.
Lee pegs 5651 as a key level the S&P 500 needs to break for him to be more confident. The index now stands at 5570—its record close is 5667, hit in mid July—and is up 35% since a key low point hit in October.
“Conversely, moving under 5560 would postpone gains, suggesting a bit more consolidation [weakness] might be needed initially,” Lee wrote.
In an interview on CNBC, Lee warned the stock market could fall a bit more than 7%, and probably would be more volatile. One issue is Friday’s jobs report. If the U.S. added too many jobs in August, it could cause the stock market to assume that, after the interest rate cut that the Federal Reserve will likely do in September, it won’t cut much more, so as not to stoke more inflation.
The market will be fickle. If the jobs result is too weak, sure the Fed may cut rates more than once, but the economy would be in danger of recession. Just Tuesday, data showed that U.S. manufacturing activity has declined. Any resulting drop in the S&P 500 could create a buying opportunity.
This rally has been broad, with tech titans like Nvidia leading the way as artificial intelligence creates new sales opportunities. Other sectors have joined in. The average stock on the index—average all names on the index without weighting their performance by market value—has risen 27% since the October low.
Investors and traders have been willing to buy up stocks, reflecting their confidence in earnings and the rate picture. The economy is still growing, albeit more slowly, but the market isn’t assuming a recession at the moment because of the Fed’s expected cut.
Now, Treasury rates are below peaks, markets are comfortable assuming more earnings growth, and stocks seem as if they’re worth the risk versus safer bonds.
Price, though, does matter. At some point, for stock prices to keep climbing, investors need proof that current earnings growth projections are achievable and won’t deteriorate.
Even with a Fed cut, rates are still higher and the economy probably will keep seeing cracks in the short term before growth hits a bottom.
That is why the S&P 500 has struggled to crack above its record high.
The reality is that stock buyers have shied away when the index hits roughly this level. The index posted a swift recovery from its early August bottom, but since late August, it has been essentially flat.
The market has already reflected a slight dip in rates and higher earnings. Now, to post substantial gains, it needs to see evidence that growth will reaccelerate, something that may take months to materialize.
For anyone looking to buy the market, just don’t go all in today.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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