Stocks are taking off on a 'liquidity rally' and will rocket to new highs in 2024, Fundstrat says

• Stocks are in the middle of a liquidity rally, according to Fundstrat's Tom Lee.
• The S&P 500 will rocket to a new high of 5,200 in 2024, Lee said.
• "The Fed is no longer fighting an inflation war, but really shifting towards managing the business cycle."

Stocks will rocket to a new all-time high in 2024 as the Federal Reserve shifts to less-restrictive monetary policy and allows a liquidity rally to take off in the market, according to Fundstrat's Tom Lee.

Lee, who has been one of the most persistently bullish forecasters on Wall Street this year, predicted the S&P 500 could end up soaring to a record 5,200 by the end of 2024, implying a 13% upside from the index's current levels.

That's largely due to expectations that the Fed could slash interest rates next year as inflation continues to cool off in the economy. Central bankers raised rates to a target range of 5.25%-5.5% to lower high prices, but rates could fall as low as 3.2%-3.5% next year, Fundstrat predicting, implying around 100 basis-points of rate cuts.

"The Fed is no longer fighting an inflation war, but really shifting towards managing the business cycle —  huge change," Lee said in an interview with CNBC on Friday.

Markets already appear to be pricing in lower rates in the economy. Credit spreads are narrowing, with US investment grade corporate bond spreads recently tightening to their lowest level since 2022, according to Bloomberg data. Meanwhile, high-yield bond prices have rallied. That wouldn't be the case if the current rally in stocks was a fluke, Lee said.

"It's actually an improving liquidity rally, while investors took $420 billion out of stocks this year," he added.

Meanwhile, cyclical stocks, bank stocks, and small-cap stocks have all turned higher in recent weeks, which is atypical for the later stages of the business cycle. That suggests the market is in a state of expansion, he added, supporting the uptrend in equities.

Other forecasters on Wall Street have generally warmed up to the prospect of a soft-landing and so-called immaculate disinflation, a dream scenario for stocks that involves the US avoiding a recession while inflation cools. Another positive year for the S&P 500 is becoming a widely held view on Wall Street, with  Bank of America, Deutsche Bank, and Société Générale also predicting the index could notch a new all-time-high in 2024. 

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