Wall Street strategist and head of Fundstrat Global Advisors Tom Lee is bullish on the stock market.
“This bull market has not showed any signs associated with a ‘late-cycle’ bull market, like investment spending hitting 27% of GDP or an inverted yield curve,” Lee said in an email to Business Insider. “In fact, the current investment spend at 23% of GDP is normally a trough level in past recessions.
“While we are not giving targets beyond YE2014, we see peak earnings at least at $US150 and if P/Es reach 18X then, it would suggest an index level of 2,700 or higher.”
With the S&P 500 trading at around 1,980 today, this means we could squeeze out another 36% out of the market.
This guess puts Lee, the former chief US equity strategist for JP Morgan, a little behind Morgan Stanley’s Adam Parker, who believes we could see 3,000.
Lee currently has a 2,100 year-end target for the S&P 500.
The CapEx Story
US corporations spent much of the post-crisis recovery shoring up their balance sheets, hoarding cash and scaling back leverage. However, this also came with a tightening of capital expenditures, that is business investment spending. Equipment aged and workers made due with whatever equipment they had on hand.
But recent data has revealed that corporations are just beginning to loosen their purse strings. And there is almost no economist out there who doesn’t see this as bullish.
“Notably, with investment spending so low (still 1-standard deviation below the LT average), we believe there remains substantial pent-up demand for future growth,” Lee wrote in a note to clients.
Examining data from the Bureau of Economic Analysis, Lee found that the average age of consumer durable goods and business capital equipment is at the 99th percentile.
“The argument against this normalization [of investment spending] is that businesses and consumers have become more capital efficient and are likely to exercise new caution and a reluctance to spend excessively following the severe downturn recently witnessed,” Lee wrote.
“However, can businesses and consumers really continue to delay spending if capital stock is this old?”