Fundstrat's Tom Lee predicts a stock market rally following the Federal Reserve's rate decision for five key reasons.
First, he notes that the S&P 500 is currently "soft" ahead of the FOMC meeting, a trend that has historically preceded rallies four out of seven times.
This suggests a potential relief or surprise factor that could boost investor confidence post-meeting.
Secondly, Lee suggests that investors have largely priced in the possibility of fewer rate cuts than previously expected, with the market currently anticipating around three cuts of 25 basis points each.
Even if this expectation is reduced to just one cut, Lee views it as dovish, with the only real risk being if the Fed decides to hike rates in 2024, which he deems improbable.
Thirdly, Lee points to the movement of interest rates, particularly the decline in yields on the 10-year Treasury, as a signal of a short-term peak, which could further support a stock market rally.
Additionally, Lee highlights Federal Reserve Chair Jerome Powell's recent leaning towards a dovish stance in his testimony to Congress, suggesting that Powell is likely to strike a similar tone in the upcoming meeting.
Lastly, Mark Newton of Fundstrat predicts that the S&P 500 could reach 5,250 to 5,300 after the March meeting, implying an upside of about 2.5% from its current level of 5,174.
Despite prevailing skepticism among institutional investors and their expectation of a "hawkish" Fed, Lee remains bullish on stocks, expecting them to rally following the Fed's update on monetary policy.