• According to Tom Lee of Fundstrat, the stock market is facing two challenging months.
• Lee said he remains optimistic about the stocks despite possible short-term downside through the end of the year.
• He gave six reasons why stocks could still gain 10% in the second half of the year.

The stock market is facing a tough two months, but according to one of Wall Street’s most optimistic forecasters, investors could still see a strong recovery by the end of the year.

Tom Lee, head of research at Fundstrat, issued a rare bearish view on near-term stocks on Monday, predicting the next eight weeks could be difficult for investors. That’s largely due to the turmoil surrounding the upcoming presidential election, he said in a video to Fundstrat clients, pointing to recent presidential polls that show Harris and Trump remain neck and neck.

Stock prices have fallen about 4% since the beginning of the month. Lee said stocks could end up falling as much as 7% and predicted the S&P 500 could bottom as low as 5,350, slightly lower than the benchmark index on Monday morning.

However, this should not discourage investors who continue to hope for a strong year for stocks, he said.

“While the eight weeks will be challenging, I think we should not lose sight of the full year, which I think will turn out to be quite strong,” Lee said, listing six reasons why he believes shares could rise as much as 10% at the end of this year:

1. The economy appears to be avoiding a recession

Despite fears of an economic slowdown, the US economy remains on solid ground: GDP grew by 3 percent in the second quarter.

The labor market developed as expected in August and the unemployment rate fell slightly to 4.2%.

“The soft landing is intact. I don’t think we are heading for a recession,” Lee said.

2. High-yield bonds rose last month

This is a positive signal for the stock markets, considering the overall performance of stock prices relative to bonds since the beginning of September, Lee noted.

3. More and more stocks are increasing

The share of S&P 500 stocks gaining versus losing companies hit a new high in August, another positive sign for stocks that could indicate another market top is coming, Lee said.

This was the case in 2007. That year, the S&P 500 up/down line reached a new high in May, just months before the overall index hit a new high.

“I don’t think we should say the market has peaked for this year,” he added.

4. Nvidia’s sell-off is not an isolated case

Investors are unsettled by the recent wave of selling at Nvidia, the darling of the AI ​​industry, which has fallen by about 20 percent since its peak in mid-August.

But that may not be the omen for the market that some investors believe, given Nvidia’s historic declines. Last month’s sell-off marked the 21st time in the past 25 years that Nvidia has lost between 25 percent and 30 percent, Lee said.

5. Share prices have been developing positively since the first half of the year

Stock markets have had a strong 2024 so far, with the S&P 500 up 10% in the first half of the year. Since 1950, stocks have risen in the second half of the year 83% of the time after gaining 10% or more in the first half, with the average gain in the second half being 10%, Lee noted.

“History already shows that we will finish this year strong,” he said.

6. Investors may have already experienced the lowest point of the election year.

In this election year, a historically turbulent time for the markets, stock prices may have already reached their lowest point.

While market volatility in election years typically peaks in October, stock prices tend to bottom out in August, Lee said, meaning investors may already have seen the worst of the losses.

“So keep that in mind. We’re in for a challenging eight weeks, but I think the lows from August are here to stay,” Lee said.