There are 2 big catalysts that could spark a stock market rally this week, according to Fundstrat

Investors should expect a stock market rally this week amid two big catalysts, according to Fundstrat’s Tom Lee.
Lee expects solid earnings from Nvidia and dovish comments from Fed Chair Jerome Powell at Jackson Hole.
“I think the Fed might be worried something’s going to break” amid a renewed surge in interest rates, Lee said.

The stock market’s 5% sell-off in August is likely to find its bottom this week and stage a rally amid two big market-moving catalysts, according to Fundstrat’s Tom Lee.

The decline in stocks over the past few weeks has been driven by Fitch’s downgrade of US debt, poor seasonality, and slowing economic data out of China. But those issues could soon be overshadowed by Nvidia and Jerome Powell.

In a Monday note, Lee highlighted that Nvidia’s earnings report after the market close on Wednesday and Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole on Friday represent big market-shaking catalysts that could spark a surge in stock prices.

“Stocks risk/reward has shifted positively this week. The key will be the direction of interest rates but we see positive catalysts emerging at the end of this week,” Lee said.

For Nvidia, investors are eagerly awaiting its second-quarter earnings results three months after the company issued a jaw-dropping guidance update that catapulted its stock to a $1 trillion valuation. Lee expects good news from the company.

“We know Nvidia is going to have good results. We just know that they’re selling every chip they produce,” Lee said in a video update to clients. Lee expects the company to provide assurance to investors about the fast-growing artificial intelligence market, and that could help spark a rebound in technology stocks.

The second catalyst investors should watch this week is Fed Chair Jerome Powell’s speech at Jackson Hole on Friday, which comes amid a renewed surge in interest rates. The 10-Year US Treasury rate is currently above 4.30%, its highest level in more than 15 years, while the average 30-year fixed mortgage rate has solidly moved above 7%.

“We think the Fed is likely somewhat bothered by the rise in 10-year yields. This represents a meaningful tightening in financial conditions and threatens to push mortgage rates higher,” Lee said.

The surge in interest rates comes at a time when inflation has made meaningful progress in moving lower, and it also triggers some painful memories back to February and March, when a surge in interest rates represented a breaking point for regional banks, with Silicon Valley Bank ultimately imploding.

“This 50 basis point surge in yields could trigger a financial problem somewhere,” Lee said of the recent jump in interest rates, as it did earlier this year with the regional banking crisis.

Altogether, this could lead Powell to make some dovish comments during his Jackson Hole speech, along the lines of acknowledging that progress has been made on the inflation front and that perhaps the Fed is done, or almost done with its interest rate hikes.

“I think the Fed likely says something dovish-ish. Why? Does Fed want to risk another ‘something breaking’ ala February 2023? While some look back at August 2022 when Fed Chair Powell’s [Jackson Hole] statement was hawkish and marked the local top in 2022 (stocks fell -19% next 8 weeks), we think the context is the opposite, Lee said.