Tom Lee’s Bullish Forecast and Sectors to Buy

By on September 16, 2014

Thomas Lee - Fundstrat Global AdvisorsTom Lee, former JPMorgan chief U.S. equity strategist and founder and head of research at Fundstrat Global Advisors was on CNBC yesterday providing his forecast for equities and some interesting historical insights.

Lee forecasts that stocks will have a strong performance into year-end; rising 6% to the 2,100 level on the S&P 500.

Lee said this bull market has followed the past playbook for previous bull markets throughout history. “Tightening only hurts stocks after the first rate hike,” Lee said.

Lee claimed that only 10% of investment managers were beating their benchmarks, while the norm is 26% at this point in the year. He implied that managers would be moving into equities in order to improve their relative performance.

As far as sectors go, Lee said the areas most likely to outperform were technology and healthcare.

Lee stated the U. S. had massive accumulated wealth with an equity to GDP ratio of 300%, dwarfing the rest of the world.

Lee said in Europe, where the population is older, investors have a higher allocation to equity-like investments than in the U. S.

Lee said fixed income is riskier than equities and stocks remain under-allocated.

Lee said his firm looked at all long bull markets and arrived at four signs indicating a peak:

  • Investment spending gets to 27% of GDP — it’s 23% today ($800 million incrementally)
  • Profits usually peak at 50% above the old high — we’re only at 24% indicating S&P 500 earnings can get to $150-$160
  • The long yield curve (10-year versus 30-year) has always inverted prior to the peak.  It’s currently at 75 basis points (still steep)
  • At the peak stocks are more expensive than bonds — currently they’re 2 standard deviations cheaper

A year ago Mr. Lee made the case for equities being “super cheap” relative to fixed income and said investors would be surprised by how much PEs expand the next 2-3 years [link].

One Comment

  1. John Templeton

    September 16, 2014 at 12:28 pm

    “While we are not giving targets beyond YE2014, we see peak earnings at least at $150 and if P/Es reach 18X then, it would suggest an index level of 2,700 or higher,” Thomas Lee:

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