Prepare for a 7% US Stock Market Drop

An analyst who accurately predicted the U.S. stock market's performance last year believes that after this month, the U.S. stock market may fall by 7%.

One of the most optimistic forecasters on Wall Street who accurately predicted the U.S. stock market's trajectory last year is now warning investors that the U.S. stock market will soon take a hit.

Fundstrat's head of research, Tom Lee, said that after this month, the U.S. stock market could potentially drop by up to 7%.

His warning is unusual for U.S. stock market bulls, as Lee maintained an optimistic outlook on the U.S. stock market throughout last year and correctly forecasted a 24% increase in the S&P 500 Index (SPX). Earlier, he also stated that the index would reach a historical high of 5,200 points by 2024.

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In an interview on Wednesday, Lee said that the uncertainty surrounding the Federal Reserve's pace of interest rate cuts and the recent volatility in economic data could lead to a slight new high for the U.S. stock market by the end of the month, followed by a 7% pullback.

The U.S. stock market has already seen some declines last week, partly due to a series of remarks by Federal Reserve officials suggesting that they are still uncertain about how low interest rates will go this year.

Federal Reserve Governor Waller said this week that the Federal Reserve should not rush to cut interest rates until it is certain that it can achieve its goal of reducing inflation, which triggered a brief sell-off in the stock market.

At the same time, there are still signs that inflation needs to cool further before the Federal Reserve is ready to ease monetary policy. The U.S. CPI annual rate accelerated to 3.4% in December, higher than economists' expectations, and retail sales data were also stronger than expected.

With the federal funds rate still at its highest level in more than two decades, there is a considerable risk that the U.S. economy could fall into a recession before the end of this year. The New York Fed estimates that the likelihood of the U.S. falling into a recession by December of this year is 63%, higher than the 50% predicted last month.

Lee suggested that these concerns will persist for months, which will inevitably depress the U.S. stock market. He said:"Inflation is trending towards a slowdown, and the Federal Reserve wants to keep real interest rates from being too high, but we don't know what kind of rate cuts it will implement, nor when these cuts will occur. This is the tension that will continue to pervade the market for the next six months."