The stock market could become 'untouchable' if the regional banking crisis continues to spiral, Fundstrat says

• The stock market could become "untouchable" if the regional banking crisis continues to spiral out of control.
• Fundstrat's Tom Lee warned about the potential implications if the Fed, FDIC, or White House intervenes.
• "This raises too many tail risk issues including credit tightening, commercial real estate, and wide economic implications," Lee said.

The stock market is on the verge of becoming "untouchable" if the ongoing regional banking crisis spirals out of control, according to Fundstrat's Tom Lee.

The comments are striking considering that Lee has consistently been one of the most bullish equity strategists on Wall Street, setting his 2023 year-end price target at 4,750, about 15% higher than current levels. 

Lee's concern about the potential implications of further bank collapses is centered around the idea that government intervention to contain the crisis often coincides with a complete "risk-off" environment for the stock market.

"The entire stock market becomes somewhat 'untouchable' if investors feel that the FDIC, Fed or White House needs to intervene in the banking system," Lee said in a Friday note.

That worry has grown considerably following the recent collapse of First Republic Bank, which had nearly $230 billion in assets and was taken over by JPMorgan on Sunday after the bank entered FDIC receivership. That follows the downfall of Silicon Valley Bank and Signature Bank in mid-March, which had combined assets of about $320 billion in assets.

The instability among regional bank stocks was on full display this week, with reports of a potential sale of PacWest Bancorp leading to a decline of as much as 75% this week. Meanwhile, reported (and denied) deal talks at Western Alliance Bancorp led to a steep sell-off of as much as 69%. Both bank stocks have since pared their losses.

Lee's cause for concern about the banking crisis and the chilling effect it could have on the stock market is based on the type of risks that could percolate if the instability continues.

"This raises too many tail risk issues including credit tightening, commercial real estate and wide economic implications," Lee explained. "This is a tough time to argue adding risk."

Also not helping matters is the fact that the Federal Reserve moved forward with its 10th consecutive interest rate hike on Wednesday, increasing the federal funds rate to above 5% for the first time in 16 years.

But there is still hope that the crisis could be contained, according to Fundstrat technician Mark Newton, who argued this week that the regional banking stocks could find their bottom on Friday. So far, that projection is playing out well with shares of PacWest Bancorp and Western Alliance Bancorp surging 89% and 42% in Friday's trading session, respectively. 

"It wouldn't be surprising to see Regional banks via $KRE [ETF] try to bottom out and rally at a time following a big breakdown in Regional banks," Newton said in a recent note. 

The SPDR S&P Regional Banking ETF surged more than 6% on Friday, suggesting that the regional banking crisis could ultimately be contained without spilling over into a bigger problem for the stock market.