Jul 10, 2024
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Inflation has been a pressing issue in America, but according to Tom Lee, the surge in price levels could soon be a thing of the past.
In a recent CNBC interview, the market expert and head of research at Fundstrat Global Advisors, remarked, “I think the war on inflation has been meaningfully better in terms of progress.”
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According to the latest data from the Bureau of Labor Statistics, the U.S. consumer price index was unchanged in May, following a 0.3% increase in April. Year-over-year, the CPI rose by 3.3%, down from its peak 12-month increase of 9.1% observed in June 2022.
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Lee anticipates additional progress in combating inflation.
“I know there’s a lot of dispute, but I think the last two inflation reports and the fact that 55% of inflation components are back to pre-pandemic levels means inflation is really going to fall like a rock,” he said.
Lee is not alone in his optimistic outlook on U.S. price levels.
In a June op-ed for The New York Times, Nobel laureate Paul Krugman wrote, "We may or may not have brought inflation all the way back to the traditional (but arbitrary) target, but inflation really doesn’t look as if it should be a major preoccupation at this point." However, he did add that he's "beginning to get a bit worried about an economic slowdown."
The recent progress on the inflation front bolsters Lee’s confidence in stocks.
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S&P 500 predictions
Lee has made some notable calls about the U.S. stock market.
In December 2022, he projected that the S&P 500 Index would hit 4,750 by the end of 2023. Remarkably, the index closed at 4,769.83 on the last trading day of 2023, deviating by a mere 0.4% from his forecast.
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The bullish strategist anticipated further upside in the benchmark index. In December 2023, he set a year-end price target of 5,200 for the S&P 500 for 2024.
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However, after witnessing the market’s strong performance in January 2024, he suggested that the 5,200 target might be too low.
The upward momentum has indeed been strong: the S&P 500 currently stands at around 5,598, marking an 18% increase year to date.
Lee told CNBC that the fundamental picture now “looks stronger.” He anticipates better-than-expected earnings and, coupled with cooling inflation, expressed confidence that “multiples can expand.”
He recognized the need for a revised target.
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“I think 5,200 is clearly too low, but I don't know how much above 5,500 there is into year-end. So I think in a couple weeks, we'll be addressing that,” he said.
Inflation revisited
Regarding inflation, Lee noted two particular aspects that are easing: “The biggest pressure on many companies’ margins has been wage pressures — that's cooling a lot — and gasoline is cooling, and that's really helping consumer wallets.”
However, he emphasized that the easing of inflation does not equate to a decrease in price levels.
“We're not talking about overall inflation going negative. It's actually that it's going towards 2%,” he said.
Indeed, even though the headline inflation rate is no longer as high as it was in the summer of 2022, the prices of many necessities remain elevated.
For instance, the food index from the CPI has increased by 26% since the beginning of 2020. Similarly, the shelter index has risen by 23% during the same period.
There are also differing perspectives on the future path of inflation. Earlier this year, economist Peter Schiff predicted that inflation could reach double digits in 2025, cautioning that “the first digit may not be a one.”
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Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
