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- A new bull market is forming as the Fed acknowledges that inflation falling, according to Fundstrat's Tom Lee.
- Lee pointed to Powell's surprisingly optimistic comments on Wednesday, when the Fed chief pointed to disinflation.
- That suggests the central bank will dial back its aggressive policy, which could spur a 20% rally in stocks, Lee said.
A new bull market is now underway, and stocks are on track to rise at least 20% this year as Federal Reserve Chair Jerome Powell admits inflation is falling, according to Fundstrat's head of research Tom Lee.
"The recent expansion in market breadth and broadening participation, in our view, validate a bull market is underway," Lee said in a note on Tuesday, pointing to the strong performance in stocks since bottoming in October of last year. "2023 is going to prove to be [the] year of 'more opportunity and less crisis."
Lee's bullish outlook came after the Fed announced a smaller rate hike of 25 basis-points on Wednesday. The move was followed by what Lee described as Fed Chair Jerome Powell's surprisingly optimistic comments on inflation.
Though the head central banker had previously shocked markets with his hawkish tone, he acknowledged for the first time that Fed's aggressive rate hikes of last year have started cooling off the economy–spurring a brief surge in stocks on Wednesday afternoon.
"Notably, Powell cited the word 'disinflation' 13 times in this press conference. This is a major change in language and tone and shows that the Fed is now officially recognizing the growing disinflation forces underway," Lee said.
That spells good news for the market: central bankers hiked interest rates an aggressive 425-basis-points last year to control inflation, a move that caused stocks to lose 20% and have raised the odds of a potential recession. Pausing or dialing back rate hikes could lead the S&P 500 to gain at least 20%, Lee estimated, considering the stock index's dismal performance last year.
Lee has urged the Fed to start pausing hikes or cutting rates for months, as signs of tanking inflation are "everywhere," he added. In particular, plunging housing prices could mean that inflation is falling much more rapidly than central bankers perceive, and while some experts note that services inflation is still high, goods inflation is on the decline, he said, suggesting it could set stocks up for a sizeable rally.
Lee's view differs from more hawkish Wall Street commentators, who foresee a recession slamming the economy in the first half of the year and causing stocks to lose another 20%. A number of top banks have said that they expect a recession in 2023 to spark another leg down for stocks, sending the market lower by up to 25%.