Will there be a sharp rise after the Fed's decision? Wall Street bulls make another bold prediction

Former Chief Equity Strategist at Morgan Stanley, now Head of Research at Fundstrat, Tom Lee, has made another eye-catching prediction. His forecast suggests that the market will receive good news in the coming days.

In a note to clients on Tuesday, Tom advised investors to "buy in fear" ahead of the Federal Reserve's interest rate policy announcement early Thursday Beijing time.

Lee stated that in the five trading days following the FOMC meeting, the market (U.S. stocks) is highly likely to surge by 4% to 5%, with small-cap stocks leading the way. "In short, we believe that risk appetite starting from Wednesday could drive the S&P 500 index up by 100 points," he told clients.

This is the latest in a series of significant and largely successful views Tom has shared in recent months. His view on small-cap stocks leading the rally aligns with his earlier prediction this year that the Russell 2000 index would surge by 50% in 2024. Tom mentioned that investors should expect small-cap stocks to rise by at least 6% in this current uptrend.

For reference, indices focused on small-cap stocks have seen gains of over 10% year-to-date. With increasing hopes of a Fed rate cut, investors have been pouring into these companies, driving the index up by 9.5% so far in July.

He said, "We still believe this is the 'summer of small-cap stocks,' so we lean towards buying. A 5% rise will push the S&P 500 index to a new intraday high, surpassing the record set earlier this month."

According to the Chicago Mercantile Exchange's (CME) FedWatch Tool, Fed funds futures pricing indicates a probability of over 95% that the FOMC will keep rates unchanged at the July meeting. However, investors will mainly focus on signs that the Fed is preparing to cut rates starting in September, with Fed funds futures trading indicating a 100% likelihood of easing by then.

Concerns that the AI frenzy driving the bull market may have gone too far were exacerbated as Microsoft's earnings intensified worries late Tuesday, leading to a broad sell-off in major tech stocks. The successive declines in large-cap tech stocks dragged the Nasdaq 100 index down 9% from its all-time high, putting it on the edge of a correction. As signs of cooling inflation fuel bets on a September rate cut by the Fed, the market is truly shifting towards cyclical sectors.

Tom Essaye of The Sevens Report said, "If the Fed does not signal a rate cut in September, given the recent weakness in tech stocks, the market could get a bit ugly, especially in the case of poor earnings."

If the Fed is indeed set to begin a rate-cutting cycle, then stock bulls have a historical advantage. According to financial research firm CFRA, in the six previous rate-hiking cycles, the S&P 500 index has averaged a 5% increase in the year following the first rate cut, while the small-cap Russell 2000 index has seen a 3.2% rise

According to Savita Subramanian from Bank of America, the S&P 500 index may have already achieved this year's gains, but this benchmark index still provides investors with plenty of opportunities. Although she maintains a neutral stance on the index overall, she suggests that substantial returns may be possible in the following areas: dividend stocks, "old-school" beneficiaries of capital expenditures (such as infrastructure, construction, and manufacturing stocks), and other themes not centered around artificial intelligence