A 'vigorous move' will push stocks another 5% to record highs before year-end — and it'll be driven by skeptical investors who still have ample cash to deploy, Fundstrat's Tom Lee says
- Stocks are set to move to record highs as investor disbelief in the current market rally shows no signs of abating, according to Fundstrat's Tom Lee.
- In an interview with CNBC's Scott Wapner on Friday, Lee explained that he is still hearing a lot of investor skepticism from clients as the S&P 500 flirts with record highs.
- That, combined with $5 trillion in cash sitting on the sidelines, sets the stage for stocks to make a "vigorous move" higher, Lee said.
- Lee boosted his year-end price target for the S&P 500 to 3,525 from 3,450, representing 5% upside potential from current levels, and said the rally will be in part driven by "epicenter" stocks.
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Despite the S&P 500 index knocking on the door of all-time highs, investors continue to show signs of disbelief and are not embracing the current market rally.
That's according to Fundstrat's Tom Lee, who said in an interview with CNBC's Scott Wapner on Friday that stocks are set for a "vigorous move" higher thanks to investor skepticism and $5 trillion sitting in cash.
"I've been surprised at how many people want to fade this [rally]. So many of our clients think that this is the level to get out of the markets," Lee said.
It's not difficult to understand why so many investors might be skeptics of the markets currently.
According to LPL's Senior Market Strategist Ryan Detrick, the S&P 500 just posted its best 100-day rally on record, having jumped 51% since March 23 despite an economic recession and tens of millions of Americans being unemployed.
But in reality, there are four big reasons that explain why the stock market can keep moving higher despite a weak underlying economy.
And rather than getting out of the market near record highs, Lee thinks new all-time highs in the S&P 500 would be "a sign of a renewed bull market."
As of Friday afternoon, the S&P 500 traded less than 1% below its all-time intra-day high of 3,393.
Lee raised his S&P 500 year-end price target to 3,525 from 3,450, according to the interview, representing 5% upside potential from current levels.
One group of stocks that will help drive further gains in the market are "epicenter" stocks, according to Lee, which are companies within sectors that have been hit hardest by the COVID-19 pandemic.
According to Lee, these beaten-down stocks have become lean, mean operating machines as they cut costs during the pandemic to stay afloat. Now, once a COVID-19 vaccine is made available to all, these stocks will have much operating leverage to work with as they see a sharp rebound in business.
On top of that, the epicenter stocks are underowned by most investors, as many instead favor technology and growth stocks.
Circling back to the negative skepticism, Lee highlighted a recent story of receiving an "angry email" from a client who said that the recent market calls by Lee represent a lapse in judgement.
Lee went on to say, "These are people I've known for 10, 15 years that are really skeptical of the S&P, so when you have skepticism at nearly $5 trillion in cash, and even AAII reading showing retail sentiment is quite bearish, I think this move to all-time highs is going to create a scramble, and I think that's why we get a vigorous move."
And according to Detrick, there's a good chance that Lee will be proven right.
When stocks have historically printed 100-day gains of more than 22%, they were positive 78%, 83%, and 94% of the time in the ensuing three-months, six-months, and 12-months, respectively, according to Detrick.
Additionally, the average gains in stocks were 2.7%, 5.3%, and 9.4% in the following three, six, and 12 months after the 100-day rally, according to Detrick.
