Good News Tonight? Wall Street Bulls Predict a Sharp Rebound for US Stocks According to Tom Lee, co-founder and head of research at investment firm Fundstrat Global Advisors, investors should expect a "sharp rebound" in the US stock market following the release of the July CPI report on Thursday. While the market generally expects a 0.2% increase in both overall CPI and core CPI for July, Fundstrat's data science team predicts that the inflation rate will be lower than expected, at only 0.15% or an annual rate of 1.8%, slightly below the Fed's target of 2%. Lee, who warned investors just over a week ago about August being a historically challenging month for US stocks, believes that the July CPI report could serve as the catalyst needed for a stock market rebound by reinforcing the view that the Fed will end its rate hike cycle.
"We believe the data (0.15%) will surprise to the upside... The main driver is still the drag on CPI from falling used car prices. This positive surprise, in our view, will be enough to offset the 'bomb' that rattled markets on Tuesday," he added. The "bomb" Lee referred to includes Moody's downgrading credit ratings for several regional banks due to concerns about a possible recession. Moody's recently downgraded the credit ratings of 10 small to medium-sized US banks and stated that it may downgrade ratings for major banks such as Bank of America, BNY Mellon, PNC Bank, and Truist Financial Corp. Lee believes that if the July CPI report comes in lower than expected, it will be enough to drive a stock market rebound, recovering all the losses seen this month. Such a rebound would imply at least a 2% increase in the S&P 500 index. He also noted that his confidence in the moderation of the CPI report partly stems from the fact that since the end of 2019, cars and housing accounted for 66% of inflation growth. However, the price increases in cars and housing are now significantly slowing down.
"Investors have overlooked the significant impact of used cars and housing on inflation. As these factors cool off, the remaining factors may not lead to a surge in overall core inflation again," he added. Furthermore, Lee stated that investor sentiment has worsened too much amid the successive declines in the stock market, which could increase the likelihood of future stock market gains. "Investors seem to have become much more cautious, which is a good thing from a sentiment perspective. The market also seems oversold. Therefore, we believe there is a very high chance of a strong rebound in the stock market after the CPI release," he stated.