Photo: Bloomberg TV
JP Morgan’s Tom Lee has been one of the more bullish voices on Wall Street.So, it’s interesting to note that he’s is sticking to his 1,430 year end target for the S&P 500, which is actually 2 per cent below where stocks closed today. (Then again, he published that target when the S&P was at 1,230.)
In his latest note to clients, Lee confidently argues that stocks will climb in the near term.
“We see a ‘melt-up’ into Election Day,” writes Lee on the cover of the report. “S&P 500 to EXCEED 1,495 short-term…market’s base case is Obama victory.”
The S&P is just 2 per cent from clearing that modest 1,495 hurdle.
However, Lee backs that call with his monster 59-page report, which may be one of the most convincingly bullish cases ever.
“It is a secular bull market…let’s face it!” he exclaims.
We summarize his 7 key arguments:
- “Global economy is turning (or less bad)” – Despite the lagging European and Japanese economies, JP Morgan’s economists see global growth picking up in the second half of 2012 driven by easy monetary policy in the emerging markets and a tailwind in inventory trends.
- “We see a US durable goods boom larger than 1990s” – Durable goods spending as a percentage of GDP is a whopping three standard deviation below its long term average. The rebound will be fuelled by US housing starts, which are coming back.
- “Corporate are the incremental buyer of equities” – Corporate cash balances are still high and share buybacks are surging. Furthermore, US equity profit margins are benefiting from a secular shift toward sale from foreign sources.
- “High-yield markets tell us fair value P/E > 15X” – Equity risk premiums are high. A 15 multiple on the S&P 500 would get you to 1,600.
- “Beta chase into year-end” – Fund managers are way under-exposed to stocks, and they will rotate their assets in.
- “No contrarian sell signals yet…” – Major sentiment indicators continue to show that investors are bearish on stocks.
- “15% chance of a fiscal cliff” – The market is pricing in overblown fears of the fiscal cliff.
Photo: JP Morgan
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