The market has been on a lean trot since last week.
Major averages pulled back from multi-month highs amid rate fears. Now, the most bullish analyst on Wall Street is giving a bold, "tactical call" for the S&P 500 Index.
What Happened: The market moves a lot around the consumer price inflation (CPI) report and it's always a big market event, said FundStrat's Tom Lee in an interview with CNBC.
A "tactical sort of opportunity" was emerging, he noted. Last week, the market sold off because the jobs report was strong and bond yields popped.
So, investors are kind of discounting a "higher for longer," scenario and are a little bearish into this week, Lee said. The analyst expects core consumer price inflation to come in at a monthly rate of 0.2% or lower, which could be a huge downside surprise.
The core inflation rate would be the lowest since August 2021, the analyst said. That's a huge break of pattern — almost to a two-year low.
Lee said the cooling would show that the Federal Reserve is going to get monthly inflation to levels it is trying to target. The 0.2% monthly rate is 2-1/2% on an annualized basis, he noted. Moreover, the analyst sees similar numbers for the next couple of months, which in turn would push short-term rates down and trigger a rally.
About 42% of the CPI basket on a weighted basis is in deflation now, which is far higher than what anyone would expect, the analyst said. He, therefore, expects future inflation to fall. When shelter cost starts flattening out, then the percentage could be 70% or more.
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The short-term S&P 500 call, the analyst said, is due to the urgency FundStrat gelet for its clients.
The CPI report could be “the first piece of really good news that the Fed can point to, to say that’s why we’re slowing the pace," Lee said. "Since the end of the second quarter, stocks have been a little choppy. So I think it is the moment they can sort of inflect."
Good News From China: Lee sees China's deflationary trend to have a positive impact on U.S. China producer price inflation and U.S. prices are correlated, he said. "It’s going to feed over into the US as lower prices either as better profit margins or lower CPI.
"I think there’s a lot of entrenched skepticism. I think some of that will be scattered on Wednesday with the CPI, Lee said.
Earnings Not A Worry: On earnings, the analyst noted that recent earnings are doing better because of energy. Energy is now going from adding to earnings this quarter to actually a 25% drag.
"Excluding energy, S&P earnings are up year-over-year. So it’s the first positive year-over-year, excluding energy, since the first quarter 2022," he added.
The SPDR S&P 500 ETF Trust (NYSE:SPY), an exchange-traded fund that tracks the S&P 500 Index, edged down 0.03% to $438.46, according to Benzinga Pro data.
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