TOM LEE: US investors are so bearish, it's bullish

We’re just about half way through 2015, and so far US stocks have disappointed investors.

The S&P 500 is only up around 2% year-to-date.

Fundstrat’s Tom Lee, however, thinks things will start to pick up soon.

In a note to clients on Friday, Lee attributed the relatively weak returns, in part, to depressed energy prices and the strong dollar.

However, he pointed to five changing conditions that he believes stocks are “poised to post substantially stronger returns” through the second half of the year.

1. Energy prices are rebounding

It’s estimated that EPS in the energy sector are down 62% this quarter, year over year. Lee says, however, that the energy drag is fading, which will allow the sector, as well as the S&P at large to see more growth later this year.

“The peak of this drag is 2Q15E and as we move through the balance of 2015, this drag fades and actually turns into a tailwind in 2016,” he wrote.

2. US Consumers are spending more

“May’s US Personal Consumption Expenditures (PCE) surged to 0.9% (11% annualized growth), the highest growth rate since 2009,” Lee wrote. “As we noted in past reports, we see lower oil as ultimately a positive for overall US GDP and S&P 500 EPS, as the US is a net consumer in oil.”

Lee says that after oil prices first dropped in fall 2014, consumers waited before spending their oil dividend (i.e. their savings on gas) on other things. The May PCE confirms that Americans are finally spending their gas money elsewhere, a great boost for GDP.

Plus, 2015 has been a record year for travel bookings. So we can expect US tourist spots to rake in a lot this year.

3. The dollar is flattening

You would think that a strong dollar could only be a good thing for US investors. But Lee says that wasn’t the case this time around. So the fact that the dollar is now flattening could be good for equities.

“[D]espite evidence showing that strong USD is actually historically good for equities, investors have seen the strong dollar as a sign of global growth/central bank uncertainty, and hence,

saw it as an argument to de-risk,” Lee wrote. “In other words, while we do not have a view on the level of dollar (DXY as a proxy), we think the more important takeaway is the dollar risk has faded.”

4. The S&P is catching up to Germany’s DAX

Germany’s DAX is an index of the country’s 30 largest companies (think Siemens, BMW, Deutsche Bank, etc.) The DAX is outperforming the S&P 500 YTD by 1,500bp — the 3rd biggest triumph since 1959. But Lee says US stocks are “due for a catch-up trade.”

Lee wrote:

History shows that after underperforming by such magnitude, the S&P 500 stages a catch-up rally into YE. The average gain is 12% and outside of two recessions, has a 100% win-ratio… Energy is arguably a factor as it is an 8% weight in the US and zero for Germany. Thus, if we see Energy stocks rallying (which we do), it will help the US indices.

5. US investors are so bearish, its bullish

The American Association of Individual Investors’ net percentage of bulls minus bears fell to -13% on June 11, its lowest point since 2013. But extremes in this case usually mean the opposite.

“Historically, the AAII survey is a contrarian indicator with a very good track record at the extremes,” Lee wrote. “For instance, since 1987, whenever the net bulls reading is this low, stocks have seen a subsequent 6-month rally 100% of the time, with an average gain of 7%.”

Thus, the fact that so many investors are bearish at the moment is a bullish sign for US stocks.

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