Retail investors will drive the stock market higher in 2023 as they start to invest their $1.8 trillion cash pile, Fundstrat says

• Retail investors could power the stock market higher this year after they "rage sold" stocks in 2022, according to Fundstrat.
• "Retail investors were liquidating stocks at such a furious pace that cash balances sit at an all-time high," Fundstrat's Tom Lee said.
• Lee highlighted that retail investors have $1.8 trillion cash at the same time expectations for a recession are falling.

The stock market should continue to trend up to record highs in 2023, and retail investors are going to help get it there, Fundstrat's Tom Lee said in a Wednesday note.

Lee observed that retail investors now hold a record $1.8 trillion in cash, and that is plenty of fire power to drive stocks higher at a time when expectations of a recession are starting to fall dramatically.

"Retail investors were liquidating stocks at such a furious pace that cash balances sit at an all-time high," Lee said, adding that they "rage sold" stocks in 2022 due to inflation and lingering recession fears.

And the cash pile grows even bigger when you include the $3 trillion sitting in money market funds held by institutional investors. That's $5 trillion of combined fire power that could make its way back into the stock market as investors grow less concerned about an imminent economic calamity.

Retail investors could put their cash pile to work soon, based on a recent sentiment shift, according to Lee.

"One of the best ways to see retail sentiment is to look at the AAII survey percentage [of] net bulls. This is showing how retail bearishness is at levels perhaps never seen in the history of they survey," Lee said.

Bearish responses to the survey outweighed bullish responded for a record streak that lasted nearly a year, but bulls just re-established themselves in last week's survey results. Now, the spread between bullish and bearish responses is turning higher.

"This turned up in May 2009 and confirmed the equity lows. This, in our view, is another sign that equity markets made their lows on October 12, 2022," Lee said.

The stock market bearishness among retail investors also spread to institutional investors over the past two years, with two-thirds of a recent BofA survey calling the current stock market rally a "bear market rally."

"Combined with the rage selling of retail, [this] argues why stocks have upside. There is a huge wall of worry ahead and a lot of liquidity and skepticism," Lee said.

Lee has a year-end S&P 500 price target of 4,750, which represents potential upside of 15% from current levels.