Last December, while most investment banks warned that 2022’s bear market would continue throughout the following year, Tom Lee told his clients to buy the dip. With inflation falling, the blue-chip index would soar more than 20% to 4,750 by year’s end, he claimed.

Some seven months later, Lee’s forecast has been proven prescient. The S&P 500 is up nearly 20% year to date, and the Dow Jones Industrial Average has now risen for 11 (likely 12 by the end of Tuesday) consecutive days—a feat only achieved on five occasions since World War II. 

What caused Lee to be so bullish, while other investment banks were sure that the Federal Reserve’s aggressive interest rate hiking campaign would ultimately spark a recession and market crash?

“I think the biggest difference was we were looking at the inflation internals and thought inflation was on a glide path lower than consensus and even the Fed expected,” the veteran market watcher told CNBC Tuesday. “We thought there was a good chance that the Fed could sort of back off its fight against inflation…that was probably the central thing.”

Despite consistent predictions from his peers on Wall Street that inflation would end up being “sticky” at around 4% to 5%, Lee stuck to his disinflation theory this year, and was vindicated again. Year-over-year inflation, as measured by the consumer price index, sank to just 3% in June, well below its 9.1% high from the same month a year ago. 

Beyond fading inflation, Lee said on Tuesday that he also had more faith in “corporate resilience” than many of his peers on the Street at the beginning of the year.

“You know, I think companies last year were given notice to prepare for this massive hiking cycle. They ran expenses really tight and delivered earnings this year that have been much better [than expected],” he told CNBC, arguing this outperformance should “support” stock prices from here.

Finally, Lee was and continues to be bullish because his peers were and continue to be so bearish. “Most professional investors think the market is going to go down,” he said, noting that Wall Street equity strategists’ average year-end price target for the S&P 500 implies an 8% downside. “People are bearish and ready to sell. No one is really embracing this as an upward new bull market.” 

Professional investors’ overly pessimistic disposition has left a lot of cash on the sidelines, according to Lee, which should be deployed into stocks when they drop, putting a floor on prices.

What’s coming for markets

Despite repeated recession predictions and rumblings of a stock market bubble created by investors’ A.I. enthusiasm, Tom Lee decided to increase his price target for the S&P 500 to 4,825 earlier this month, implying a potential 5.5% jump in the index by year-end. 

With inflation fading, Lee believes the Fed will ultimately stop its rate-hiking campaign this year, which should help boost economic growth. “There’s a lot of potential stimulus coming” in the form of lower mortgage rates, he said. “At a 3.7% 10-year [Treasury yield], the 30-year mortgage [rate] should be 5% or so. So when that drops, that’s huge stimulus.”

He also noted that the U.S. economy already had two negative quarters of GDP last year, and some have argued that a rolling recession in key sectors of the economy is currently underway, which could mean the worst of the economic pain from the Fed’s rate hikes is over. 

On top of that: “Companies have battened down the hatches, they’re not going to get tripped up,” Lee said, arguing that a U.S. recession or stock market crash is unlikely over the next two years.

Lee and his team at Fundstrat believe that stocks will continue their march higher, but the market leaders for the remainder of the year could be very different.

Big Tech stocks—and particularly a group of companies now labeled the Magnificent Seven, which includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms—have soared throughout 2023, but Lee says the bull market might expand out to other tech firms, as well as companies in the industrial and financial sectors, through year-end. 

Even Wall Street’s biggest bull admitted last week that he expects the market to experience volatility in the near term, because it appears to be “overbought” and “vulnerable to bad news.” But Lee still believes investors remain overly bearish, which would put a floor under any coming correction.

“I’m kind of sympathetic to the view that there are signs of a correction,” he told CNBC. “But on the flip side I think there are too many who are quickly calling this a top. That puts me in the camp where, whatever weakness we have may end up proving to be shallow.”