- There are five reasons why the stock rally will broaden to more names this year, Tom Lee said.
- Lee had the most accurate stock market outlook for 2023, accurately forecasting a big year of profits.
- A dovish Federal Reserve, an easing housing market and improving capital inflows will push more stocks to rally.
Markets entering 2024 face a quite different setup than last year, and that's a key that will unlock a rally in many more stocks across the market, said Fundstrat's Tom Lee.
"We believe one of the biggest changes in markets in 2024 will be broadening the market breadth, meaning more stocks will participate," Lee wrote in a note Wednesday.
Lee was one of the few Wall Street bulls who started last year and ended with the more accurate stock market outlook for 2023.
Beyond the band of roaring Magnificent Seven tech stocks, Lee says there are five reasons why he sees more stocks participating in a market rally in 2024, with key trends moving in the opposite direction from last year.
First is the policy stance of the Federal Reserve. Unlike last year, the central bank's stance is markedly more dovish. In the 2022-2023 cycle, the Federal Reserve raised interest rates 11 times, from near zero to a range of 5.25%-5.5%. Now, officials have signaled a shift toward lowering rates (although the exact timing is hotly debated).
Then there are interest rates, or 10-year Treasury yields, which are falling rather than rising as they would toward 2023.
The real estate market is also relaxing, with more inventory and the drop in mortgage rates has allowed more homes to be sold. After exceeding 8% in October, 30-year fixed mortgage rates have fallen to 6.6% and could fall below 6% this year.
The outlook for capital spending, which is the money companies are spending on their businesses, also looks more optimistic, Lee noted, which bodes well for stocks.
And finally, reversing the outflows from stocks between October 2022 and December 2023 (investors withdrew a total of $240 billion), Lee said about $5.5 trillion in money market funds will return to stocks. as the Federal Reserve indicates rate cuts.
"Furthermore, the fact that we have reached all-time highs is in itself a milestone," Lee wrote, citing the S&P 500's record close last week. "As we recently highlighted, hitting an all-time high destroys the bearish thesis. There is no bear market where stocks hit all-time highs. And in fact, 10 out of 11 times stocks made more gains in the next 6 months."
