The stock market could buck historically poor seasonal performance and rise in September as upcoming data is likely to show inflation easing, Fundstrat says

• The stock market has entered its worst time of the year based on seasonal data, but Fundstrat thinks it can buck that trend.
• That's because upcoming economic data releases will likely show a continued cooldown in inflation.
• "Even with bad September seasonals, a roadmap exists for positive catalysts into month-end," Fundstrat's Tom Lee said.

The stock market has entered its worst time of the year based on seasonal data, as mid-term elections often equate to heightened volatility for risk assets.

But Fundstrat's Tom Lee expects the S&P 500 to buck its seasonal trends and ultimately move higher this time around as upcoming economic data is likely to show a continued cooling down of inflation.

"Even with bad September seasonals, a roadmap exists for positive catalysts into month-end," Lee said in a Friday note to clients. The big data release will be August's CPI report, scheduled to be released next week. The data will be released as forward inflation expectations "are tanking," Lee said.

Gasoline prices continue to move lower, which is a sizeable input for both inflation and inflation expectations among consumers. Meanwhile, home prices have been on the decline, which should ultimately translate into lower rent prices over the coming months, according to Lee.

"At a time when Fed officials are still talking tough on inflation, we think this remains a setup where downside reads in inflation means [the] Fed has less work to do," Lee explained.

"Less work" for the Fed means fewer interest rate hikes, which would be welcomed by stock market investors that have been increasingly concerned about a restrictive interest rate regime.

Also helping boost potential upside in the stock market over the next few weeks is continued readings of depressed investor sentiment. The latest AAII retail sentiment survey showed an extreme bearish reading of -35%, which mirrors the reading of -38% around the mid-June low.

"This is a contrarian signal and extreme bearish readings bode [well] for equity upside," Lee said.

Other upcoming data releases that could show a cooldown in inflation include the August PPI report on September 14 and the University of Michigan Consumer Survey on September 16. Those data sets will be key for the Fed as it meets on September 21 to likely raise interest rates. But the meeting could be another "sell the news, buy the event," Lee said.

"Over the course of this month, the incoming cadence of data could support the notion that the inflationary pressures in the US are past the peak. And perhaps more importantly, could be falling quickly," Lee said.

On top of inflation falling, the US dollar and treasury yields could also ease, which would be supportive of risk asset prices.

"Combined with the incoming economic data and [a potential drop in the US dollar and yields], these could be supportive of equities building on strength in September," Lee said, reiterating his year-end view that the S&P 500 could surge 27% to 5,100.