This strategist had Wall Street's most accurate stock market forecast in 2023. Here's what he thinks is in store for 2024

• Fundstrat's Tom Lee had the most accurate stock market outlook for 2023, while almost everyone else was bearish.
• A year ago, he said the S&P 500 would end 2023 at 4,750, which is within 1% of its current level.
• Here's what he expects the stock market will do in 2024. 

Fundstrat's Tom Lee raised plenty of eyebrows this time a year ago when he forecasted that the S&P 500 would soar more than 20% in 2023 to end the year at 4,750.

Investors were still licking their wounds from a brutal bear market that lasted nearly all of 2022, and there were few indications that suggested a strong stock market recovery was imminent.

"US economy remarkably resilient in the face of rapid Fed hike cycle. The plurality of equity investors expect an inevitable recession as Fed hikes until it breaks something. But if above assessment [falling inflation, end of rate hikes] is correct, a 'soft landing' is the highest probability," Lee said in his 2023 stock market outlook.

And that's just what happened, with calls for a soft landing in the economy increasing as the Federal Reserve ended its interest rate hiking cycle thanks to falling inflation.

The S&P 500 has soared 25% in 2023 to its current level at about 4,785, which is within 1% of Lee's initial 2023 price target. In fact, his forecast came the closest to predicting the S&P 500 among the strategists tracked by Bloomberg.

Lee, who was one of the few bulls on Wall Street last year, is once again expecting a solid year ahead for the stock market, with a S&P 500 price target of 5,200 for the end of 2024, representing potential upside of 9% from current levels.

Here's what Lee expects to happen next year, according to his 2024 outlook released earlier this month.

The key driver

The easing of financial conditions throughout 2024 will be the key driver to further stock market gains, he said. The Fed has signaled that its next interest rate decision is more likely a cut than a hike, and the market is currently pricing in at least five 25-basis-point cuts next year.

If interest rates continue to fall from their recent peak, that should lead to lower mortgage rates which should help revitalize the housing market. And if inflation continues to fall, enabling looser financial conditions, then consumers' real incomes should rise, giving them stronger purchasing power.

Corporate earnings

Lee expects the S&P 500 to deliver earnings-per-share growth of 11% in 2024 to $240 and 8% growth to $260 in 2025, mainly driven by a cyclical recovery in profits.

"Corporate capex fell past few years, but easing financial conditions mean capex recovers," he said, adding that GDP growth should recover in Europe and Asia, helping boost the global economy.

Also lifting corporate profits in 2024 should be a weaker US dollar and a rise in productivity.

Stock valuations

"We see price-to-earnings expanding in 2024 towards 20x. While many argue for valuation compression, since 1937, the higher price-to-earnings [ratio] realized when yields [are between] 3.5% to 5.5%. When between 4% to 5%, price-to-earnings is more than 18x 65% of the instances," Lee explained.

His 2024 S&P 500 price target of 5,200 is derived from applying a 20x earnings multiple to his 2025 guidance of $260 per share.

Best ideas

Lee's top idea for 2024 is small cap stocks, which he believes could play catch-up to the broader market next year and surge upwards of 50%. He also likes stocks in the financials, industrials, and technology sectors.