The stock market could be on the verge of a significant shift, with a crucial inflation report potentially triggering the next major sell-off, according to Tom Lee, the head of research at Fundstrat.
What Happened: The February Consumer Price Index (CPI) report, scheduled for release on Mar. 12, could be a turning point for the market in 2024, reported Business Insider. The report will indicate whether the Federal Reserve is likely to cut interest rates.
"To us, this is also the decision point for markets in 2024. If the Feb CPI is 'hot,' even if for statistically wrong reasons, we think markets could become anxious," said Lee.
The February inflation report follows a January CPI report that was hotter than expected. Lee pointed out that some of the seasonal factors that drive up prices in January could spill over into February.
Should the February CPI report come in higher than anticipated, it could put the Fed in a difficult position and lead to a more hawkish stance from the central bank. This could potentially trigger the most significant sell-off in the stock market since its record rally began in late October.
"It seems like the Fed cannot ignore the optical issue of two CPI prints that appear to be breaking the downtrend. Thus, it seems like stocks could see selling pressure on the heels of this," Lee said.
Lee has suggested that the S&P 500 could experience a 7% sell-off in early 2024, which would send the index down to 4,777, around the stock market's previous record highs.
Why It Matters: The stock market has been showing remarkable resilience in 2024, with inflation easing and the Federal Reserve less worried about the robust U.S. job market, as highlighted by Lee in a previous report. This could be the first major challenge to the market's strength.
Meanwhile, Federal Reserve Chair Jerome Powell has hinted at the possibility of interest rate cuts in 2024, citing the uncertain economic outlook and the need for cautious movement.
The European Central Bank (ECB) also lowered its inflation forecasts while maintaining interest rates, in line with the Federal Reserve's cautious approach.
On the other hand, Tom Lee has also been bullish on Bitcoin's future, predicting a rise to $150,000 before the end of the year.
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