There are 2 big catalysts that could be a 'game changer' for the stock market this week, according to Fundstrat's Tom Lee

• Two big catalysts this week could represent a "game changer" for the stock market, according to Fundstrat's Tom Lee.
• The outcome of Tuesday's midterm elections and Thursday's CPI report could turn around investor sentiment.
• "As hopeless and negative as sentiment appears, positive data points could be on horizon," Lee said.

The stock market has two big catalysts that could serve as a "game changer" for investor sentiment this week and help push stock prices higher, according to a Monday note from Fundstrat's Tom Lee.

Those events are Tuesday's midterm elections, and the release of the October CPI report on Thursday.

Depending on how both events turn out, stock prices could surge as a lot of bad news is already priced into markets.

On the midterm election front, Lee suspects that a Republican takeover in the House and the Senate would have a deflationary effect due to likely gridlock and fiscal restraint.

"If the Republicans gain control of the Senate, we think funding for the war would also become more difficult. And this likely puts pressure on US policy regarding Russia-Ukraine," Lee said. That's because a Congress in Republican control appears less likely to approve more aid for Ukraine, which would put pressure on the country to negotiate with Russia.

"I think Ukrain fatigue is setting in," Fundstrat's head of policy strategy Tom Block said.

On the CPI front, Lee highlights that there are signs suggesting October's inflation report will come in under consensus estimates. For one, betting markets see October CPI at +0.45%, slightly below estimates for 0.50%.

"We think medical insurance, weaker cars, plus housing possible could drive downside in October CPI," Lee said.

Any beat in October's CPI report could reverse the damage seen in the market following August's hot CPI report, in which the S&P 500 fell 15% after CPI doubled consensus estimates.

October CPI "could be as much a 'game changer' as 'hot' August CPI [that] derailed S&P 500 [from] 4,120 to 3,491," Lee said. "The October CPI, if soft, means Fed no longer has 'back to the wall' on fighting inflation = very consequential."

Perhaps what's more consequential is that investor expectations are extremely low, so any better-than-expected news could lead to a significant reversal in stock prices. Lee cited a recent survey of investors that showed 63% expect a severe recession in 2023, with consensus that the S&P 500 will finish 2023 at 3,540, which is lower that current levels.

"That is bleak," Lee said. "As hopeless and negative as sentiment appears, positive data points could be on horizon," Lee said. All eyes are on the results of Tuesday's midterm election and Thursday's October CPI report.