Tom Lee, co-founder and research director of Fundstrat Global Advisors, a US investment firm, stated in his latest report that the next major catalyst that could trigger a sell-off in US stocks is the February CPI report.
He explained that the inflation data scheduled to be released on March 12th (next Tuesday) will send a signal to investors whether the Federal Reserve will soon cut interest rates.
"For us, this is also the decision point for the 2024 market. If the CPI is' hot 'in February, even due to statistical errors, we believe that the market may become anxious," he wrote.
Lee emphasized that some seasonal factors that drove up prices in January may continue into February.
Lee quoted economist Jens Nordvig as explaining that companies often raise prices in January, with some of the price increases occurring after the January CPI survey period. This means that the price increase at the end of January will not be apparent until the CPI report in February.
"From a historical perspective, after the Consumer Price Index became 'overheated' in January, the CPI in February often also became 'overheated'. That is to say, the remaining seasonal factors that led to higher prices in January often continued into February," he wrote.
He said that ultimately, if the February CPI report is indeed higher than expected, it could put the Federal Reserve in a difficult position and lead to the bank taking stronger action. The two month high inflation report will make investors question whether the Federal Reserve will cut interest rates this year and how many times it may do so.
He wrote, "That's why the February CPI report may trigger the most severe sell-off in the stock market since a record rebound began at the end of October last year."
"The Federal Reserve seems unable to ignore the visual effect of two consecutive CPI data breaking the downward trend. Therefore, it seems that the stock market may face selling pressure as a result," he added.
Finally, Lee also stated that the S&P 500 index may experience a 7% sell-off in early 2024, which will cause the index to drop to 4777 points, just around the historical high of the stock market.
However, overall, his target price for the S&P 500 index by the end of 2024 is set at 5200 points, based on his expected P/E ratio of $260 per share for 2025, which is 20 times.
Lee is most optimistic about small cap stocks this year, and he believes that small cap stocks may catch up with the overall market this year, with an increase of over 50%. He also likes stocks in the finance, industry, and technology sectors.