Fundstrat's Tom Lee is sticking with his bullish year-end stock market forecast even as yields soar and equities plunge amid sticky inflation

• Plunging stock prices, soaring interest rates, and sticky inflation are not enough to change Fundstrat's conviction on the market.
• Fundstrat's Tom Lee outlined why he still expects a year-end stock market rally in a Friday note.
• "Fed could do far less tightening as the market is doing Fed's work," he argued.

Stocks are plunging, yields are soaring, and inflation remains sticky. Yet Fundstrat's Tom Lee remains resolute in his view that the stock market will soar into year-end.

In a Friday note, Lee stuck with his thesis that the S&P 500 could rally to Fundstrat's year-end target of 5,100, representing potential upside of 37% from current levels.

That's despite the Fed's Wednesday FOMC meeting, which led to another aggressive 75-basis-point interest rate hike, in addition to more hawkish remarks from Fed Chair Jerome Powell. That commentary has led investors to expect even more rate hikes going into 2023, with a terminal fed funds rate of 4.6%.

In response to the Fed's most recent meeting, short-term treasury yields soared to their highest level since 2007, while stocks have plunged about 4%.

Lee's bullish stock market confidence stems from the idea that forward-looking indicators show inflation is indeed beginning to cool off, and that will lead to a less hawkish Federal Reserve in 2023, contrary to Powell's most recent comments.

"Our continuing analysis shows leading indicators point to disinflationary/deflation," Lee said, highlighting an ongoing decline in the Manheim Used Vehicle Index, recent commentary from FedEx and Costco management teams about falling prices, and lower oil prices.

If inflation is indeed "dropping like a rock," then the "Fed could do far less tightening as the market is doing [the] Fed's work," he added.

"Take a step back. If inflation by December 2023 is 2.8%, and Fed funds by December 2023 is 4.6%, this could be viewed by investors as constructive. After all, monetary policy by then is already restrictive, and there would be room to cut rates," Lee said.

Aside from a less hawkish Fed than the market currently expects, a resilient corporate earnings base could also surprise investors going forward, the note said.

"US corporates remain impressively resilient, enduring the pandemic global shutdown with cost discipline, and US corporates are weathering the inflation surge impressively as well," Lee said.

The resiliency of both businesses and the US consumer was on full display in Costco's fourth-quarter earnings results, which revealed comparable same-store-sales growth of nearly 14%, well ahead of analyst's 12.5% estimate.

Finally, investor sentiment "is rock bottom and worse than the Great Financial Crisis by some metrics," Lee said. That tends to be a bullish contrarian signal when investor sentiment hits extremes. The most recent AAII investor sentiment reading showed bullish respondents falling to levels not seen since 2009.

"There are greenshoots," Lee said.