The stock market could soar as much as 30% next year as expectations grow for the Fed to slash rates and inflation to drop 'like a rock,' Fundstrat's Tom Lee says

• Stocks could soar as much as 30% this year, Fundstrat's Tom Lee said.
• Lee predicted the S&P 500 would notch 5,200, implying a 9% increase from the index's current levels.
• But there's actually a 50% chance of the index soaring past that, thanks to this century-long trend.

According to Fundstrat's Tom Lee, the S&P 500 stands a chance of soaring as much as 30% next year, with the expectation that inflation will continue to drop and the Fed will finally slash interest rates.

Lee, who has made a name as one of the most consistently bullish strategists on Wall Street, predicted the S&P 500 would surge to 5,200 by the end of 2024, implying a 9% increase from the benchmark index's current levels.

Lee's predictions are primarily based on the Fed's expected rate cuts and inflation dropping "like a rock", as he has previously predicted. These factors should give stocks the runway to soar in 2024.

"Consumers will realize that the rate of price increases is slowing," Lee said in an interview with CNBC last week, adding that inflation falling to 2% would be a "very visible" possibility next year.

"Double-digits is more than 50% probability," Lee said of S&P 500 gains in 2024, even considering that stocks already notched double-digit gains last year.

The index actually has more than a 50-50 chance of notching those double-digit gains, he said, pointing to a century-long trend between stocks and Treasury yields.

Since 1900, stocks have been likely to notch double-digit returns when the 10-year Treasury yield hovers between 3%-4%, Lee said.

65% of the time Treasury yields have traded within this range, the S&P 500 notched a price-to-earnings multiple of more than 18. And 50% of the time, the price-to-earnings ratio was more than 20, Lee said.

Treasury yields have fallen within this golden range over the past few weeks, thanks to investors ramping up their expectations for Fed rate cuts. And though Lee's 5,200 price target assumes stock multiples staying the same, an S&P 500 multiple of 20 would imply a 30% surge in stocks this year, he said, assuming corporate earnings are set to grow around 10%.

Lee was spot-on in his stock market forecast in 2023, having predicted the S&P 500 would soar over 20% to end the year around 4,750. The benchmark stock index ended the year around 4,769, less than 1% away from Lee's target.