Amidst the impressive 30% rally of the S&P 500 since its mid-October low, investors are raising concerns about a potential correction, considering the rally’s apparent stretch.

However, Fundstrat’s Tom Lee has a different perspective. In a Friday note, he acknowledged the possibility of a typical 5% pullback but argued that such a decline could be a buyable dip, and the stock market might not be as overextended as some believe.

Lee highlights upcoming catalysts that could bolster the stock market’s bullish stance. The Federal Reserve meeting on July 26 might bring the last rate hike of this cycle. Additionally, the July 28 release of personal consumption expenditures price data is expected to reflect the cooling inflation trends seen in the June CPI report. Furthermore, the July CPI report, scheduled for August 10, is anticipated to show continued disinflationary pressures.

“We believe the next 2-3 weeks have positive fundamental catalysts that could pleasantly surprise the markets. This means the correction path has a somewhat narrow window. In other words, the weakness could reverse by July 26,” Lee stated. “Fundamental drivers keep us constructive, even with the S&P 500 appearing overbought.”

In addition to these fundamental catalysts, Lee presents three indicators suggesting the stock market isn’t overly extended:

  1. S&P 500 vs. its 200-day moving average: Despite being 12% above its 200-day moving average, historical data shows that the S&P 500 has traded more than 20% above this average at least eight times since 1970, indicating a robust market.
  2. Bearish sentiment among professionals: Institutional investors show a mere 17% inclination to increase equity exposure, marking a multiyear low. Comparatively, back in January 2022, a substantial 85% planned to add more stocks to their portfolio. Meanwhile, equities rank as the most underweight asset class in Bank of America’s July fund manager survey, with bonds holding the biggest overweight position. This skepticism among professionals suggests opportunities in the market.
  3. Retail sentiment in early stages of turning bullish: Although the AAII weekly investor sentiment survey shows retail investors have become bullish amid the stock market rally in recent months, their sentiment is still in the early stages of bullishness. Lee notes that this shift in retail sentiment comes after an extended period of bearishness, indicating a potential for prolonged gains as investors gradually become more bullish.

While concerns of a correction loom, these indicators and upcoming catalysts lend optimism to the stock market’s resilience and potential for further gains.

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