Investors should consider buying stocks ahead of this week’s release of the April CPI report, as suggested by Tom Lee of Fundstrat. Lee believes that the current setup is favorable for higher stock prices, especially as disinflation continues to make progress.
According to Lee, an in-line CPI report or better could increase the likelihood of three interest rate cuts this year. This news comes as the S&P 500 has already seen significant gains this month, with a nearly 4% increase so far.
Lee’s optimism is based on the expectation that the upcoming April CPI report will show progress in disinflation, which would lead to a boost in stock prices as investors start pricing in more interest rate cuts from the Federal Reserve.
“We think an ‘in-line’ April CPI will cause the number of Fed cuts to rise from ~1.8 (by year-end 2024) towards 2.5 cuts or more,” Lee said. “The rationale, in our view, is that this April CPI will highlight the possibility that auto insurance’s disproportionate impact on CPI is ebbing.”
Economists are anticipating the April Consumer Price Index, set to be released on Wednesday, to show a 0.31% increase. Lee’s bullish outlook is supported by ongoing declines in the volatility index, the US dollar, and long-term interest rates. Additionally, other central banks, such as Sweden’s Riskbank and the Bank of England, have started cutting interest rates.
In conclusion, Lee advises investors to consider the “buy in May” trade, as he believes that stocks will continue to rise. With positive signals in the market and expected softening of key components of inflation, Lee remains optimistic about the potential for higher stock prices in the near future.
