History shows the stock market is headed for red-hot gains in the next 2 months as equities mirror the moves of the last financial crisis, Fundstrat says

• Stocks are headed for red-hot gains and could rise 5% by the end of April, Fundstrat's Tom Lee said.
• Falling inflation means the Fed can pull back on its rate hikes, which have weighed heavily on the market.

Stocks are headed for red-hot gains over the next two months, as the market is mirroring the rebound after the last financial crisis, according to Fundstrat's Tom Lee.

In a note on Monday, Lee rebuffed concerns that the current rally has been a fluke, as stocks have been on the uptrend for the past five months despite posting hefty losses in February. That mirrors the rebound seen in 2009, he said, when market bears brushed off gains in S&P 500 as another headfake, though the stock index was actually recovering from its fall from the Great Recession

Commentators are warning that more downside could still be in store in 2023. Inflation remains well-above the Fed's 2% target, despite central bankers having raised interest rates to their highest level since 2007 to lower prices. And the inverted yield curve – a notorious indicator of a downturn – is now flashing its biggest recession signal in over 40 years.

But stocks are still set to post strong gains, according to Lee. Inflation has been falling from its highs of last year, and while the yield curve is flashing a warning for an imminent recession, that's mostly because inflation is expected to be higher in the following years, despite still being on the downtrend, he said.

That suggests central bankers have room to pull back on their aggressive rate hikes, which weighed stocks down 20% last year. Though some investors are pricing in a 50-basis-point rate hike in March, Lee predicted the Fed would raise rates by just 25 basis points. A smaller rate hike is dovish by comparison, which could jump start a hot rally over the next eight weeks.

His forecast is supported by the strong rally the S&P 500 saw over the first five days of the year. In the past seven occasions since 1950, a strong first week has led to an average gain of 6.8% over March and April, Lee said, adding that February was likely a minor setback in the overall uptrend.

"Median gain of March and April are the strongest," Lee said. "Hence, we think the next 8 weeks is a period of 'buy the dip.'

He has urged investors to get back into stocks for months, and previously predicted the S&P 500 would retest an all-time-high in late 2022, though the stock index would actually end the year 20% lower. He predicted the next could reach 4,250 by the end of April, implying a 5% gain from current levels.