Stock market outlook: February drop sets up 'buy the dip' rally in March

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The February sell-off sets the stock market up for a powerful 'buy the dip' rally in March and April, Fundstrat says

surged higher in March with a 100% win ratio, delivering median gains of 3.1%. In April, the gains were also strong with an 86% win ratio and median gains of 4.2%. To support further upside in stocks is the fact that valuations are"hardly demanding," Lee said, highlighting that the S&P 500's forward price-to-earnings ratio, excluding mega-cap tech giants, is at just 14.8x. Meanwhile, the FAANG stocks are trading at a forward P/E ratio of about 22.7x.

"We hear investors say the market is too expensive. But this is distorted by the higher multiples of FAANG, and we think the higher multiples of FAANG are justified," Lee said. Lee said the technology sector remains Fundstrat's favorite sector pick for 2023 after a brutal 2022, and the year-to-date outperformance in FAANG stocks relative to the broader market is a good sign that the gains can continue as their earnings estimates bottom out.

"Those saying technology is a 'sell' are overlooking that EPS momentum is turning positive," Lee said. Lee has a year-end S&P 500 price target of 4,750, representing potential upside of 20% from current levels.

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