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The stock market is poised for a powerful “buy the dip” rally in March and April, according to Fundstrat’s Tom Lee.Lee highlighted that investor sentiment still leans bearish, and that’s fuel to push stocks higher.The February decline “is a buy the dip moment, as the next 8 weeks should be among the strongest,” Lee said.
The stock market is poised for a powerful “buy the dip” rally in March and April after February’s sell-off reignited bearish sentiment among investors, according to Fundstrat’s Tom Lee.
Lee noted that investor sentiment has been quick to shift into negative territory during any sign of stock market weakness, and it speaks to the idea that investors remain overly bearish towards stocks.
Consider that from February 8 to February 22, the stock market declined by just under 3%, yet bearish respondents to AAII’s weekly investor sentiment survey soared 54% to levels above its historical average. In other words, investors are on edge and are concerned that the strong start to January was simply a bear market rally.
“Many think investors are about to walk into boiling oil with conviction based upon the ‘hot’ inflation and economic data of January. But there are reasons to view January strength in inflation as counter trend. Moreover, February was set to be a ‘payback month’ meaning the probability of gains in the month were low,” Lee explained.
With February now in the rear view mirror, strength could quickly return to the stock market in March and April, according to Lee.
Specifically, when screening for years when the first 5 trading days of the year were positive after a negative year, identical to the setup seen at the start of this year, gains in March and April are common place.
According to Lee, since 1960 and considering the first 5 trading days of the year rule, the S&P 500 surged higher in March with a 100% win ratio, delivering median gains of 3.1%. In April, the gains were also strong with an 86% win ratio and median gains of 4.2%.
“We think the next 8 weeks is a period of ‘buy the dip,” Lee said.
To support further upside in stocks is the fact that valuations are “hardly demanding,” Lee said, highlighting that the S&P 500’s forward price-to-earnings ratio, excluding mega-cap tech giants, is at just 14.8x. Meanwhile, the FAANG stocks are trading at a forward P/E ratio of about 22.7x.
“We hear investors say the market is too expensive. But this is distorted by the higher multiples of FAANG, and we think the higher multiples of FAANG are justified,” Lee said.
Lee said the technology sector remains Fundstrat’s favorite sector pick for 2023 after a brutal 2022, and the year-to-date outperformance in FAANG stocks relative to the broader market is a good sign that the gains can continue as their earnings estimates bottom out.
“Those saying technology is a ‘sell’ are overlooking that EPS momentum is turning positive,” Lee said.
Lee has a year-end S&P 500 price target of 4,750, representing potential upside of 20% from current levels.