Fundstrat's head of research Tom Lee says the stock market is in the midst of a "most hated" rally, with skeptical investors clinging to reasons why the market should fall.
In a new update, Lee says he believes the current surge, which has lifted the S&P 500 by 17% from recent lows to within 3% of an all-time high, reflects a powerful but underappreciated rally.
"Part of this [bearish sentiment] is understandable. We had a black swan event on post-tariff liberation day, meaning an unexpected event, and we had a 20% fall in stocks in a very short period of time."
As for what's coming next, Lee points to historical patterns where doubt has fueled rallies.
"When stocks began to rally after March of 2020, many fund managers said we're still in a bear market.
And recall in the fall of 2022 after the markets made its low in October 2022 a lot of investors were saying that this was just another bear market rally investors are about to make a mistake...
But here's the reality - investors flip bullish as soon as you make an all-time high. So in other words, investors generally fight after a decline. They'll fight the rally until you make a new all-time high. At a new high, they turn they turn around and become bullish and I think that that's going to happen as soon as markets make a new all-time high."
Lee says Bitcoin's recent all-time high above $111,000 is another leading indicator for the S&P, because Bitcoin peaked about a month before the S&P did and they're both tracking increased global liquidity.
As for Moody's downgrade of US government debt from AAA to AA1, Lee says he doubts it's a negative signal for markets, noting that S&P first downgraded the US in 2011 and Fitch followed in 2023.