And Now, to Brighten the Gloom, a Bullish Take

The S&P 500, after a lovely 2021 rally, is down 10.6%—and continued its losing ways Thursday with a 0.5% drop. Small wonder investors have got the blues. Inflation is up 7.9%. Interest rates are slated to rise, too. War rages in Ukraine, endangering energy and wheat supplies, not to mention the risk of a widening conflict with thermonuclear consequences no one wants to think about.

Despite all this woe, it’s interesting to listen to a bullish argument. The well-regarded Tom Lee, research chief at Fundstrat Global Advisors, expects that the index will increase to 5,100 or higher by year-end. That would mark a 19.7% climb from yesterday’s close, and a 7% gain for 2022.

But the rally will happen later in 2022, he told CNBC. This year’s first half is not going to be pretty, in his view. “I think we are in no man’s land for the moment,” he said, adding that he’d previously predicted a rough first half, although he was surprised how things have turned out even worse. The reason for that, he noted, was Russia’s invasion of Ukraine.

“Do I think stocks will end higher from here on an absolute basis? Yes,” he said. “I think the foundation for the bull market is still intact.”

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For one thing, he expressed doubts that inflation will remain in the picture, a contention that many other strategists dispute. The main force behind inflation’s persistent elevation, he went on, is “a spike in commodities,” in particular energy. But the price surge in oil and other commodities, he said, is “working its way through the system.”

He cast doubt in a reprise of 1970s-style inflation taking hold. “As painful as that is, it is very different than being in a secular, structural inflation problem,” he said.

In the stock market, the current slump has at least resulted in shares becoming cheaper, which to him means many investors will end up taking advantage and buying. Indeed, the S&P 500’s price/earnings ratio is a little under 22, down from 46 in mid-2021. In January 2020, right before the pandemic hit, the P/E was a hair under 25.

Free cash flow, a key metric of corporate financial performance, is similarly healthy today, Lee pointed out. “Free cash flow yield on the median stock now is 5.8%,” he said. Because the 10-year Treasury yield is still relatively low (it crept up to slightly above 2% Thursday), “you’re still getting paid a pretty hefty premium to own equities.”

His heartening overall take is that “you can’t really get that hurt if you buy stocks here over the next 12 months.”