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Thomas Lee, one of Wall Street's most bullish market analysts, stands by his view that the small-cap Russell 2000 Index will be up 50% this year.
Lee has been making this prediction since the end of 2023, as stocks were enjoying a huge end-of-year rally. He made it again this past week.
The co-founder and head of research at FundStrat Global Advisors may ultimately be right. But the Russell must overcome significant hurdles.
Lee's brash predictions
Lee is an ambitious and confident financial analyst.
In summer 2022, when stocks were tanking, he was predicting a big gain for stocks by the end of the year. He was wrong then, mostly because the Federal Reserve was engaged in an intense campaign to curb inflation.
In midyear 2023, with stocks going nowhere, Lee again predicted a big year-end rally. One could practically hear all the guffaws on Wall Street.
Related: Stock Market Today: Stocks' record run on pause as bulls take a breath
This time, however, Tom Lee was spot on. To wit:
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The S&P 500 finished the year up 24.2%.
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The Nasdaq Composite jumped 43.4%.
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The Dow Jones Industrial Average added 13.7%.
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The Russell 2000 ended with a 15.1% gain, after being down as much as 7.1% on Oct. 27, 2023. The gain from that low: 23.8%.
There were, of course, two catalysts at work:
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The Fed's hint in the autumn of 2023 it was done raising interest rates. In December, Fed Chairman Jerome Powell said rates would probably come down this year.
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Exploding investor interest in the potential economic impacts of artificial intelligence.
The Fed is the key, always the key
Lee still argues the Russell will rise because:
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Rates will, in fact, come down.
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Stocks in the Russell 2000 are selling at a big discount to stocks in the S&P 500 or, say, the Nasdaq 100, where Nvidia (NVDA) , Microsoft (MSFT) , Meta Platforms (META) and other high flyers live.
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Lots of cash is on the sidelines in money markets and managed by investors waiting to pounce on bargains that might produce outsized returns.
Which brings us the current situation as the first quarter enters its last week.
The Fed is still promising to cut rates but won't say when. So, its key federal funds rate is still at 5.25% to 5.5%, a level reached in July 2023.
The federal funds rate is what the Fed wants banks to charge each other when they ensure their deposits are backed up. It is the foundation on which all U.S. interest rates are derived.
The S&P 500, Nasdaq Composite and Nasdaq 100 are all up 9% or better this year. The Dow is up 4.7%.
The Russell 1000 Index, which tracks most of the largest stocks (as the S&P 500 does), is up 9.8%.