Why you should buy the dip in stocks before next week’s jobs report, Fundstrat says

• Investors should buy stocks ahead of next week’s May jobs report, according to Fundstrat’s Tom Lee.
• Lee said the April Core PCE data showed cooling inflation and prior releases have been a tailwind for stock prices.
• “We see high probability that stocks perform well into next week’s May jobs report,” Lee said.

Investors should buy the dip in stocks ahead of next week’s release of the May jobs report, according to a Friday note from Fundstrat’s Tom Lee.

The S&P 500, Nasdaq 100, and Dow Jones Industrial Average are down 3%, 4%, and 5% from their recent record highs, respectively.

Lee said the slight decline in stocks over the past week presents investors with an attractive entry point, especially after the release of April Core PCE data, which showed a cooldown in inflation, and ahead of the jobs report.

April Core PCE was in-line with economist estimates at 0.25% month-over-month, which helped relieve investor fears following a string of hot inflation reports earlier this year.

“This is the best core PCE MoM for all of 2024 and supportive of the notion that inflation pressures are ebbing,” Lee said.

And Lee thinks future PCE reports will continue to show disinflation, which should boost the chances of Fed interest rate cuts later this year and support higher stock prices.

“We believe these improvements are sustainable. Housing is decelerating at a steady pace and converging on the market-based measures, which are not showing +6% YoY growth rates,” Lee said. “Core PCE ex-housing grew +0.22% MoM, down from +0.31% MoM in March. And the YoY has been dripping lower to 2.15% vs 2.19% YoY in March. So, outside of housing, PCE inflation is on target.”

Lee crunched the numbers and highlighted that since the end of 2022, stocks generally performed well following releases of the monthly Core PCE reports, especially when stocks were down 1% in the five days before the release.

Of the four PCE reports since the end of 2022 that included stocks falling 1% heading into the report, stocks were higher every time a week after the release of the PCE report by an average of 2.3%.

“Thus, we see high probability that stocks perform well into next week’s May jobs report,” Lee said.

The May jobs report will be released on Friday, May 7. Current economist estimates expect 175,000 jobs were added to the economy in May, with an unemployment rate stuck at 3.9%. Such a report would match the April jobs report and likely put some pressure on the Fed to cut interest rates sooner than later.