The stock market will hit a new peak but there are 4 reasons equities may feel the chill as early as February, says Tom Lee

Simply put, it’s very rare for a market to fall sharply, rally all the way back to the previous peak and then retreat significantly once more, he says.

“Since 1950, there are 11 instances where the S&P 500 fell 20% and then climbed to within 1% of its prior all-time high,” says Lee in a new note. “Eleven of 11 times, the S&P 500 quickly made an all-time high.”

The median time it took to hit the record was seven days, and as long as 20 days. This would mean new highs in January 2024.

And it’s likely the market will make further gains: “The median max gain over the next 18 months is +22%. So yes, this is a launch point for further gains. There is only 1 instance, May 2007, that the max further gain was nominal (<5%),” writes Lee.

However, the usually bullish Lee has a warning. Seven of those eleven times saw the market consolidate with a pullback. These tend to be modest, often 2% to 5%, which in the current context may take the S&P 500 back down to 4,400-4,500.

There are four potential reasons the pullback may occur this time, says Lee.

First, the market gets “itchy feet” waiting for the Federal Reserve to start its mooted campaign of interest rate cuts. This may be exacerbated by any sign the central bank officials appear uncertain about starting to ease policy — which the market sees possibly happening in March.

Second, the timeline for big technology companies to benefit from AI revenues may be pushed out by what Lee terms “a systemic hack by malevolent AI.”

Next, given the “parabolic gains” in late 2023 — the S&P 500’s relative strength index remains above the overbought threshold of 70 — Lee believes the stock market needs to consolidate.

Finally, Lee reckons that a market pullback in February to March “is consistent with election year seasonal returns.”

Still, it should be stressed that Lee is sanguine about this putative drawdown because it matches his forecast that most of the market’s gains will come in the second half of 2024, and the S&P 500 will get to 5,200.

And in the case of small-caps, he reckons they will rally through the broader market downturn, with the iShares Russell 2000 ETF
IWM
jumping 50% next year.

“After all, with falling interest rates, a dovish Fed, improving economic momentum, upturn in housing and we see a constellation of reasons for small-caps to rally.”

Markets

U.S. stock-index futures
ES00,
-0.02%

YM00,
+0.00%

NQ00,
-0.02%
were slightly firmer early Friday as benchmark Treasury yields
BX:TMUBMUSD10Y
rose. The dollar
DXY
was higher, while oil prices
CL.1,
+0.78%
gained and gold
GC00,
-0.51%
held around $2,065 an ounce..

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The buzz

U.S. economic data due on Friday includes the Chicago Business Barometer for December, published at 9:45 a.m. Eastern.

U.S. bond markets will cease trading for the year at 2 p.m. Friday, though the stock market will have a session of normal duration. Both will be closed on Monday for New Year’s Day, reopening on Tuesday, January 2nd.

Alphabet Inc.’s
GOOG,
-0.11%
Google has agreed to settle a $5 billion consumer-privacy lawsuit that alleged the company secretly tracked millions of people who thought they were browsing the internet privately, according to reports.

Nvidia
NVDA,
+0.21%
has launched a new gaming chip for China to comply with U.S. export controls.

China will release service sector and manufacturing purchasing managers indices for December on Saturday.

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The chart

The longer a bull-run in stocks goes on the less time traders think it has left. But as the chart below from Bespoke Investment shows, if history is a guide the ongoing rally has a lot further to go.

“The current bull market recently crossed the 400-day mark. If it were to last as long as the median bull since WW2, though, that would take us all the way out to the end of May 2026!” says Bespoke.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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