The S&P 500 is about to take off in a month-long rally that will retest its 2023 high, Fundstrat says

• The S&P 500 is about to recover its August losses in a rally next month, Fundstrat's Tom Lee said.
• He listed four reasons for his bullish view in a note on Tuesday.

Stocks are about to take off in a month-long rally, which could bring the S&P 500 back to its 2023 highs, according to Fundstrat's head of research Tom Lee.

While the Wall Street consensus is for a soft September, he listed four reasons in a note Tuesday to expect the S&P 500 to rise 2%-3% next month to retake the 4,600 level, recovering losses that stocks suffered during the month of August.

1. The economy is cooling off.

The Fed's aggressive interest rate hikes over the last year and a half are working to cool off the economy, and Lee expects more encouraging signs in the labor market.

He noted that the number of job openings fell to 8.8 million, also coming in below the expected 9.5 million.

That's good news for equities, as the Fed has cited a tight job market to justify its interest rate hikes, which weigh on asset prices. Higher rates were partly responsible for the S&P 500's dismal performance in 2022, the year stocks slid 20%.

2. The Fed won't hike interest rates.

Markets are already pricing in low odds that the Fed will hike rates again in September, and Lee predicted those bets will be slashed altogether.

"Given the glidepath of falling inflation and labor market strength, and the anticipated downshift in inflation expectations, we believe these odds will fall to 0%. And this should allow interest rates to commensurately fall," he said.

Markets are now pricing in 91% chance the Fed will keep interest rates level at its September policy meeting, and a 57% chance that interest rates will stay at the current level by the end of the year, according to the CME FedWatch tool.

3. Investors were too bearish in August.

Investors were overly pessimistic in August. That could be a contrarian indicator that stocks are set to do better the following month.

"We believe this past week is more evidence of the anchoring bias of 'hawks,'" Lee added.

4. September is a historically strong month for stocks.

Though stocks have historically been weak in August, they typically rebound in September. Since 1950, the S&P 500 has risen 86% of the time in September, tacking on a median gain of 3.3%.

The coming stock rally could face resistance from several left-field risks for markets, Lee warned, such as if the Fed surprises markets by hiking rates, or if the United Auto Workers union stages a strike next month, which could weigh on equities.

Still, Lee remains one of the most bullish forecasters on Wall Street at the moment, and in a previous note, predicted the S&P 500 will notch a new all-time-high this year of 4,825. He made a similar call last year, though the benchmark index actually recorded its worst performance since 2008.