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The stock market has three tailwinds that could drive further upside to record highs, according to Fundstrat’s Tom Lee.
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Lee highlighted increased corporate earnings and a lack of margin debt as reasons to stay bullish.
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“It’s just that there are so many top callers now that I think that’s why there’s still gas in the tank on this rally,” Lee said.
Fundstrat’s Tom Lee still expects the stock market to continue its surge to record highs, according to a Friday interview with CNBC.
Lee said that while there has been some ongoing profit-taking in the stock market even after a solid February jobs report, there are three reasons to expect further upside from here.
Those include solid earnings results, a Federal Reserve that is set to cut interest rates later this year, and a lack of risk-on behavior from investors.
“There is upside to earnings,” Lee told CNBC. “Earnings beat by 7% in the first quarter, so you’re already one quarter in and if consensus is $245, that means there could be ten dollars, 15 dollars of upside for just this year on earnings alone.”
And while corporate earnings continue to rise, valuations don’t appear too stretched, according to Lee, providing fuel for further upside in stock prices.
“On risk premia, which is what you should put at a P/E multiple, well if the Fed starts cutting and the economy is resilient, the P/E is only 15x ex-FAANG,” Lee said.
Even with the inclusion of mega-cap tech stocks, the S&P 500 trades at a forward P/E multiple of 20.7x, which is only slightly above its five-year average of 19.0x, according to data from FactSet.
Finally, Lee said that investors are not displaying the type of risk-on behavior often present at the top of market cycles.
“There’s still $6 trillion in cash on the sidelines. Margin debt has barely budged, it’s below where it was in October 2023 which was just a few months ago, so I don’t think investors are necessarily that risk-on. I mean I know the market is technically overbought, but Mark Newton, our head of Technical Strategy, says you don’t really want to be using overbought as a sell signal because strong markets stay strong,” Lee said.
And the lack of margin debt held by investors ultimately means that sell-offs may be short-lived as investors seek to buy the decline.
“When leverage is low, like margin debt, it means investors aren’t long yet the backdrop is improving, so that means they have to use these pullbacks as chances to get long,” Lee explained.
Lee has warned that the upcoming February CPI report could spark a short-term sell-off in the stock market to the magnitude of 7%, but ultimately, with so many investors looking to call a top, Lee sees the path of least resistance being higher for the stock market.
“It’s just that there are so many top callers now that I think that’s why there’s still gas in the tank on this rally,” Lee said.
Read the original article on Business Insider
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