Stocks are approaching a perfect buy-the-dip opportunity as the S&P 500 faces August rout, Fundstrat says

• The August sell-off in stocks is the perfect buy-the-dip opportunity, Fundstrat said.

• Markets will remained jittery over rising interest rates through the end of the month.

• The Fed’s Jackson Hole Symposium could jolt stocks back on their bullish path.

The August market rout means investors are nearing the perfect opportunity to buy the dip in stocks before they resume their rally, according to Fundstrat’s head of research Tom Lee.

Lee, who has predicted the benchmark index will notch a record high in 2023 at 4,825, warned that more near-term downside was likely in store for stocks.

Already, the S&P 500 has fallen about 5% since the start of August. That sell-off was influenced by China’s weakening economy, as well as stronger-than-expected economic growth in the US fueling a rise in bond yields. The Atlanta Fed is now estimating GDP to grow 5.8% in the third quarter.

Both of those factors could spell trouble for equities. China’s economic slump could pose spillover risks to the US, especially for tech stocks with heavy operations in China. Meanwhile, strong GDP signals the Fed could continue to hike interest rates in an attempt to slow down the economy, which is likely to weigh on asset prices. A strong economy also pushes out the timeline for any potential rate cuts, leaving intact the a “higher for longer” narrative for interest rates.

“In short, the inflation story in the US is taking a backseat. Instead the factors of rising interest rates, which hurt P/E and the story of a strengthening US economy, which means risk of more hikes, are at the front of mind for investors,” Lee said in a client note on Friday.

Central bankers have already raised interest rates 525 basis-points to slow inflation, a move that helped weigh the S&P 500 down 20% in 2022. Meanwhile, markets are pricing in a 33% chance the Fed could hike rates another 25 basis-points at the November policy meeting, per the CME FedWatch tool.

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Lee warned the downside could continue for the next five to 15 days, until about August 25, around the time the chipmaker Nvidia will report earnings for the second quarter and central bankers will convene at the Jackson Hole symposium, where Powell is expected to deliver remarks on the US economy. The rout is the perfect moment for investors to get into the market ahead of those events, which could spark a resurgence of the year-to-date rally.

“We see this more as ‘its August’ rather than the start of a larger rout,” Lee said, referring to the fact that stocks typically struggle during this month of the year. “We don’t think the market outlook has changed into year-end 2023. In fact, this will ultimately prove to be a great buying opportunity.

Lee is one of the most bullish stock market forecasters on Wall Street, with his S&P 500 target for the end of the year set to take the benchmark index 10% higher. Meanwhile, other economists have warned stocks may be overvalued at current prices, raising the odds of a correction in store for the benchmark index.

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