The stock market could surge 18% to new highs by year-end as the 2022 bear market is over, Fundstrat says

• New highs in the stock market could arrive a lot sooner than investors expect, according to Fundstrat's Tom Lee.
• He said the S&P 500 could hit new highs before year-end as the 2022 bear market is over.
• "When bad news doesn't take down markets, it is time for investors to assess," Lee said.

The stock market could be gearing up for new record highs before year-end as the 2022 bear market is over, Fundstrat's Tom Lee said in a note on Friday.

"The biggest takeaway for me on events of this week? Convincing and arguably decisive evidence the 'bottom is in' — the 2022 bear market is over," he said.

Lee's confidence stems from the fact that between a negative GDP print, another 75-basis-point interest rate hike from the Fed, and more natural gas volatility due to Russia's Nord Stream pipeline drama, a lot of bad news occurred this week and yet the S&P 500 and Nasdaq 100 managed to stage a 3% rally.

"When bad news doesn't take down markets, it is time for investors to assess," Lee said.

On the earnings front, despite a strong US dollar and heightened economic uncertainty, companies are reporting better-than-feared results. With 52% of the S&P 500 having reported second-quarter earnings already, 73% beat profit estimates by a median 7%.

Earnings matter because in the long term that's what drives stock prices.

Results from mega-cap tech behemoths Alphabet, Microsoft, Amazon, and Apple all eased investor concerns about the resilience of their growth and their ability to manage inflation, which helped drive considerable gains in their stock prices this week.

Lee believes the economy has reached the pivot point where incoming data will be decisively less negative, and disinflation tailwinds are set to strengthen. Commodities from metals to oil to grains have been on the decline in recent weeks, which has already resulted in some price declines for consumers.

And if the Federal Reserve continues to mirror the 1982 actions of then-Fed Chairman Paul Volcker, the stock market could fully recover and march to new highs in the next four months, Lee said.

"During Volcker's war on inflation, equities bottomed on August 1982. This is two months before Volcker abandoned 'anti-inflation' measures. More importantly, stocks recovered the entire 36 month bear market loss in 4 months," he explained.

Powell could also be on the verge of ditching some anti-inflation measures soon, as he hinted at Wednesday's meeting the Fed would be more data dependent in its rate hike decisions and declined to provide guidance for the Fed's September meeting. If disinflationary forces take hold, as Lee expects, it could drive Powell to pivot from the Fed's current tightening policy and pause rate hikes.

"In 2022, this means stocks could see new highs before YE. That is why we think [the] S&P 500 could be above 4,800 before year-end," Lee said, representing potential upside of 16% from Friday's close.