Here's why banking turmoil may not blow up into a financial crisis and stocks could still be set up for a bull market

• Turmoil gripping the banking sector may not expand into a full-blown financial crisis, Fundstrat said.
• That's because conditions are starting to stabilize, meaning stocks could veer toward the "bullish fork."
• "A fuller blown financial crisis is not inevitable," Fundstrat's Tom Lee said.

The turmoil surrounding US banks may not blow up into a full-blown financial crisis – and stocks could still be set up for a year of bullish returns, according to Fundstrat's head of research Tom Lee.

Lee, who has been bullish on stocks for months, pointed to the recent volatility ripping through the banking sector in a recent note, stemming from the collapse of Silicon Valley Bank earlier this month. The bank's failure has weakened confidence in the US banking system, sparking fear of a financial disaster.

But those fears could be overblown, he said, as deposit outflows overall are slowing, and Fed officials have communicated their willingness to protect bank deposits. That's lowered panic among bank customers and investors, spurring a small rebound in regional bank stocks this week.

"A fuller blown financial crisis is not inevitable," Lee said, adding that stocks could even begin to veer into the "bullish fork" ahead, so long as policymakers continue to restore confidence in the banking system and in financial markets. "There are signs that the crisis is not set to morph into a broader crisis."

Other commentators have noted stocks could benefit from SVB's failure, as the bank's implosion has put pressure on the Fed to dial back its interest rate hikes to stabilize the banking sector. That will also be positive for stocks, as equities were weighed down heavily last year amid rising interest rates.

Fed officials hiked rates another 25 basis points at their last policy meeting, less than the originally anticipated 50-basis-point increase.

Markets are currently pricing in a 50% chance central bankers raise rates another 25 basis points in May, and a 50% chance they pause rate hikes altogether — something that could set off another rally in stocks, analysts have said.

Lee previously predicted the S&P 500 would rise at least 20% in 2023, while bearish market commentators have warned of a 20% drop in the market, as the SVB collapse has significantly raised the odds of recession.

Morgan Stanley's chief stock strategist said US stocks could see near-term downside as the end of the bear market approaches.