History says there are very strong odds the stock market gains 20% this year after taking a beating in 2022, Fundstrat says

• The market bloodbath of 2022 signals positive returns for stocks this year, according to Fundstrat's Tom Lee.
• He noted that stocks were flat only 11% of the time after a negative year, whereas the market saw strong gains 53% of the time.

History shows there are strong odds the stock market will gain 20% this year after taking a beating in 2022, according to Fundstrat's head of research Tom Lee.

In a note on Friday, he said last year's market bloodbath signals a rebound in 2023, since a year of positive returns is historically more likely than a flat year after stocks performed poorly.

In the 19 negative performances the S&P 500 has had since 1950, just two of those years were followed by a year of flat returns. Ten of those years were followed by the stock index gaining 20%.

That suggests there's a 53% chance that the S&P 500 will see strong gains this year, compared to just 27% odds in a typical stock market year, Lee said.

"The odds of a >20% gain are double because of the decline in 2022. It is for this reason that we see 2023 as a year of opportunity and less of crisis," he added.

That could be spurred by easing inflationary pressures, Lee said, causing central bankers to dial back restrictive policy and give stocks more room to breathe. Fed officials could be overestimating inflation by using lagged data, and while the labor market remains hot – a reason central bankers have vowed to keep rates high – the Atlanta Fed wage tracker shows three-month annualized wages are softening.

Those are promising signals that the economy is reacting to Fed policy and could lead policymakers to ease up on tightening this year, potentially lifting stocks.

Lee also expects stock and bond market volatility to drop sharply this year as inflation eases and the Fed becomes less hawkish. That will be another key factor in stock returns, he said, and will probably outweigh the effect of weaker corporate earnings.

Historically, a change in the stock market's volatility index after a negative year has resulted in a 22%-23% shift in the S&P 500, whereas a change in earnings growth has only resulted in a 14%-15% shift.

Lee has been bullish on stocks despite rising inflation and restrictive Fed policy, and previously predicted the S&P 500 would gain 24% this year, retesting an all-time high of 4,800.

That's contrary to other Wall Street analysts, who have warned stocks will lose 20%-25% in the first half of the year and see flat returns throughout 2023, as companies continue to battle high inflation and Fed rate hikes. Those factors weighed heavily on the market in 2022, causing the S&P 500 to post its worst losses since 2008.