Fundstrat’s Tom Lee says the bottom is in and the S&P 500 (NYSE:SPY) is heading to 7,300, arguing last week proved stocks can rise even as the Iran war worsened and oil surged from $87 to $116.

The Bottom Is In

“I think the bottom’s in because last week was a period where the war was getting worse and oil was going up, but stocks weren’t going down,” Lee told CNBC’s Scott Wapner Wednesday.

“So that’s a good precondition and today now we have the rate of change that the war is de-escalating,” he added.

From mid-March, oil rose from $87 to $116 while the S&P 500 climbed from 6,300 to 6,600. Stocks rose even as the Iran war worsened. This proved stocks could handle bad news.

Yesterday’s proposed ceasefire marked a positive rate of change inflection. Stocks rose over 2%, oil dropped 15%, and the VIX fell under 20.

What Led The Rally

Since the war started six weeks ago, crypto and Ethereum (CRYPTO: ETH) led all other assets higher. Energy stocks followed, then came the Mag 7 tech stocks, software companies, and financials.

Energy rallied for obvious reasons tied to oil supply fears. Now energy will likely fall for the same reasons as oil prices retreat. 

Meanwhile, the Mag 7 tech stocks, Ethereum, and software showed the strongest negative correlation to oil in almost a decade.

As oil prices flatten or cool down, these tech and crypto names should catch a bid. They’ve gotten cheap, with the Mag 7 now trading near the same valuation as the broader market.

The Bear Market Already Happened

About 70% of the S&P 500 already went through bear market conditions. Energy and financials took their hits last year. The Mag 7 and software stocks corrected this year.

“The possibility is that the summer lull that could happen won’t be as deep because we’ve already fallen 8%,” the Bitmine (NASDAQ:BMNR) executive chairman said.

The market may avoid a typical summer selloff because stocks already dropped 8% and most sectors endured their corrections.

The Inflation Shock

An inflation shock is still ahead, though how big remains unclear. What matters is whether consumers and businesses see this as temporary or permanent. Survey data and upcoming economic reports will tell the story.

Fed fund futures show traders betting on rate cuts again. The Fed is leaning toward cuts rather than hikes, which should support stocks.

The Broadening Trade

More investors are buying U.S. stocks because the U.S. proved resilient during the crisis. The U.S. economy benefits during wartime, giving it an edge over other markets.

The broadening trade means more stocks across the S&P 500 will participate in the rally, not just a handful of leaders.

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