Fundstrat's Tom Lee Says "Buy the Dip" in the S&P 500 -- Here's Why

Tom Lee is the co-founder and managing partner of Fundstrat Global Advisors, and he entered 2023 as the most bullish voice on Wall Street. Back in December, he was telling CNBC there was an outside possibility that the U.S. Federal Reserve would not continue to raise interest rates in the new year and that the policy adjustment would light a rocket under the stock market. 

As a sign of his bullishness, he and his firm issued a 2023 price target for the benchmark S&P 500 index of 4,750 (the highest on Wall Street at the time). We know Lee was wrong about the Fed because rates continued to rise until recently, but his call about the stock market's performance has been nearly spot-on so far. We're only halfway through the year, and the S&P 500 has already climbed 13.3% and set a 2023 high of 4,425.

After the broader market traded in the red last week, Lee is out with a fresh call to "buy the dip." Here's why.

Image source: Getty Images.

Three factors could support the stock market from here

Fundstrat is watching a few specific things that could trigger further upside in the S&P 500 this year. Of course, a continued decline in inflation will likely be the primary driver, because that would signal an end to the Fed's campaign to raise interest rates. But there are three other factors to consider.

First, Lee told Business Insider that the market for initial public offerings (IPOs) is finally heating up, with restaurant chain Cava being the first notable name to record an IPO in 2023. Private companies typically won't list publicly unless they feel positive about stock market conditions, so when IPOs start to flood in, it's a sign sentiment has shifted. 

Second, Lee references the $5.5 trillion cash hoard investors are sitting on right now. Over the last 12 months, bank deposits and Treasury bills have been attractive investments because they've paid a high interest rate. Plus, they're practically risk free, which made them especially good bets last year when the stock market was crashing. 

But with the S&P 500 up 13.3% in 2023, many investors won't feel great about earning a fraction of that return in those safe-haven investments. Eventually, they're likely to deploy their cash back into the stock market. 

Finally, Lee isn't a buyer of the recession narrative. In fact, he recently told CNBC the economy might be "slipping into an expansion," given corporate earnings appear to have bottomed. If companies beat Wall Street's expectations on earnings and revenue for the remainder of this year, it's likely the stock market will only move in one direction: up.

Tom Lee continues to bet on the FAANG names

Fundstrat entered 2023 with a prediction that the FAANG stocks would lead the market higher, and the firm was dead right. For those not familiar, FAANG is an acronym for the following five stocks:

Data source: YCharts. 

All those stocks have obliterated the 13.3% return of the S&P 500 so far this year. I've personally been very bullish on Meta Platforms, Alphabet, and Amazon -- the latter of which could be en route to a $5 trillion valuation in the long term.

The broader market has also caught a boost from interest surrounding artificial intelligence in 2023, which has sent some stocks surging so high, they've even put the FAANG group to shame. Semiconductor giant Nvidia comes to mind, because its 178% gain for the year has catapulted the company into the $1 trillion club. 

Lee told CNBC the FAANG stocks will likely continue to lead the market higher for the remainder of this year. Plus, once the Fed officially stops raising interest rates, he thinks the S&P 500 could reach its previous all-time high above 4,750, which would be a "mission accomplished" moment for his firm's 2023 target.

As a result, his latest message is this: When investors see a pullback in the stock market, "that's a dip they need to buy, instead of thinking it's a top." I tend to agree.