Fundstrat’s Tom Lee is not one of those analysts.
In a huge 22-page note to clients on Friday, Lee outlined 4 reasons to think that the good times may not have come to an end yet. We summarize here:
- End of the dollar headwind: “The ‘typhoon’ dollar headwinds in 1H15 are fading and futures suggest a tailwind in 1H16 (slide 5) — aiding Industrials and Technology stocks. After being a 19%-20% headwind in 1H15, dollar gains Y/Y in 3Q are on track to be a less drastic (but still severe) 10% and based on implied futures prices gain around 5% y/y in 4Q15 and then turn into a tailwind (-3% in 1Q16). The reversal of these dynamics will naturally benefit U.S. multinationals and be particularly helpful to Technology and Industrials.”
- Oil prices have hit bottom: “Second, oil may be finally ready to generate sustainable gains, boosting Energy and allaying general disinflation concerns. Over the past 30 years, oil has managed to rally after a 2-std dev plunge, with gains posted 3, 6, and 12-mo later (87% avg 12m) — in other words, oil price action is so bad, that even under negative supply/demand dynamics, oil may be ready to rally.”
- The housing market is still strong: “Third, U.S. housing remains a bright spot, with positive dynamics in demand (household formation of 1.6mm) coupled with not enough supply (starts too low at 1.2mm). Each new single family home creates $US280k in economic activity — hence, a move towards 1.8-2.0mm starts would add $US200b in annual sales for housing.”
- We’re still way behind the last 2 bull markets: “Fourth, the current EPS cycle has seen profits rise 29% above the prior peak — still well below the 61% (2007 vs 2000) and 275% (2000 vs 1981) cycles. In other words, we believe the ability of U.S. corporates to generate additional earnings growth is substantial, driven by a recovery in U.S. investment spending.”
Lee does say that there is a possible danger that could pull the market down.
“The biggest risk to our thesis is a fundamental after-shock from the market turmoil,” he wrote. “That is, an investment bank, hedge fund or even a country experiences a severe enough shock to generate significant loss.”
Lee maintained his projection for the S&P to hit 2325.
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