Fundstrat’s Tom Lee is worried about the stock market after eight years as one of its biggest bulls.
In a note sent out to clients on Friday, Lee said a number of factors that had supported his views on the market, including attractive valuations and central-bank support, had turned neutral and potentially negative.
“Many of these factors have become neutral and potentially headwinds,” Lee said.
“We see the conditions in place for a 1H [first half of 2017] drawdown, although our original 2150 target does seem awfully hard to reach — we now look for equities to pullback to 2200-2225 in 1H.” The S&P 500 closed at 2,345.96 on Thursday.
The negative factors for stocks include the fact that the price-to-earnings ratio of stocks — one measure of how expensive they are — is now higher than it was in 2000 and 2007, just before the last two big crashes.
With the median P/E ratio at 19 times earnings, the likely scenario is a 5%-8% drop in stock prices to bring them more in line with earnings growth. Lee said it’s unlikely that earnings-per-share for companies is revised sharply higher.
Lee also saw the drop in bond yields and a flatter yield curve as suggesting that economic growth may slow down, adding to why he’s no longer as bullish on the market.
“We do not believe a ‘bear market’ is around the corner, as we believe there remains substantial pent-up demand, given investment spending is still near 50-year lows and de-regulation is supportive of transforming earnings for financials, energy and manufacturing,” Lee said.
After postponing on Thursday, House Republicans are slated Friday to vote on whether to pass the American Health Care Act. They received an ultimatum from President Donald Trump on Thursday. The bill’s passage is seen as a precursor to the rest of Trump’s economic agenda including tax cuts, which helped lift stocks to new highs before anything was implemented.
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