Fundstrat head of research Tom Lee expects the S&P 500 to reach 8,400 by year-end, dismissing market fears as “excessive pessimism.” He predicts the upcoming midterm elections will serve as a “clearing event” that propels technology and cryptocurrency stocks upward.

‘Coiled Spring’ Market Ready to Jump

Despite recent market drawdowns, Lee believes the current environment is primed for a rally, agreeing with the S&P 500 target of “maybe 8,200, maybe 8,400” before year-end, 9.22% higher from the current levels.

Affirming the characterization of the market as a “coiled spring” poised to go “much higher,” Lee told CNBC this potential is largely driven by fundamentals that many investors are overlooking.

“We are in an unprecedented time because earnings growth is accelerating,” Lee said, projecting that third-quarter earnings could see nearly 30% growth. He added that valuations have compressed, noting that “EPS revisions from the start of this year to now for 2027 earnings are up more than 20%, and the S&P is not even up 20%.”

Midterms as a ‘Clearing Event’

With midterm elections approaching, Lee anticipates the political outcome will reduce uncertainty and act as a catalyst for risk assets. He referred to the midterms as an expiration date for a correction and a “clearing event” that will likely be “a very big risk-on signal for markets regardless of outcome.”

Lee presented a contrarian view on how a potential Democratic sweep might affect the market. If Democrats control Congress, it “would be viewed as gridlock,” which markets tend to favor. He also predicted that post-midterms, Democrats will begin supporting data centers and the Clarity Act, providing a tailwind for AI and crypto stocks.

Easing Financial Conditions

A softening labor market and the rolling off of one-time inflationary pressures could allow the Federal Reserve to step back from its hawkish stance. Lee expects “softer readings on inflation” over the next six months, which will “allow bond yields to actually sort of normalize.”

He pointed to the recent strength in certain sectors as an indicator of this shift. “Tech stocks making new highs and crypto doing so well, these can’t do well in the face of tightening conditions,” Lee stated. “They’re anticipating easier financial conditions ahead.”

How Has the Stock Market Performed?

The S&P 500 index has advanced 12.35% year-to-date. Similarly, the Nasdaq Composite index is up 13.72%, and the Dow Jones has gained 8.12% during this period.

On Monday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed mixed. SPY rose 0.42% to $766.48, while QQQ advanced 1.21% to $718.36. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), ended 0.035% lower at $518.92.

In premarket trading on Monday, SPY was down 0.048%, QQQ fell 0.35%, and DIA advanced by 0.19%.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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