Investors should look to buy the dip in stocks as Fundstrat’s Tom Lee points to more gains ahead into year-end, according to a Wednesday note.
US stocks have been choppy in July, and especially this week, as the S&P 500 fell more than 2% on Monday before recovering all of those losses in Tuesday’s session. Investor concerns over the rise of the Delta variant of COVID-19 has largely been attributed to the recent volatility in stocks, as daily cases are back on the rise.
Lee gave six reasons as to why the stock market will remain resilient and continue its ascent over the coming months. Lee thinks the S&P 500 could reach 4,700 by year-end, representing potential upside of 9% from Tuesday’s close.
These are the 6 reasons why US stocks could continue their ascent, according to Fundstrat.
1. Pent-up demand from the US consumer will release a wave of “revenge spend” as the economic reopening continues to progress, according to Lee. Consumers are on solid footing, with many paying down their debts and increasing their savings rate during the pandemic.
2. Similarly to “revenge spend” for consumers, Lee believes pent-up capital expenditures from corporations will materialize as “revenge capex” takes hold. Many corporations scaled back their investments amid the uncertainty of the pandemic, but with a strong consumer apparent, many companies are racing to increase their capacity and supplies.
3. Pent-up stock buybacks will lead to corporate “revenge buybacks,” according to Lee. Corporations scaled back their stock buyback programs amid the uncertainty of the pandemic, but those are now back on the table, and could soon hit new record. Data from JPMorgan echoed Lee’s point.
“Corporates have already increased gross buybacks from pandemic era low of $525 billion to an annualized run rate of $775 billion year-to-date and should surpass previous record of $850 billion,” JPMorgan said in a Tuesday note.
4. A dovish Fed will remain dovish and possible become even more dovish due to the uncertainties of the Delta variant. This represents a “bullish surprise,” Lee said.
5. Scared policymakers due to the Delta variant will lead to more fiscal support, according to Lee. All eyes are now on D.C. as Congress wraps up work on a potential $1 trillion infrastructure bill.
6. Interest rates will remain low due to the Delta variant, leading to risk premia support, Lee explained. The yield of the 10-year US Treasury plunged to 1.12% on Tuesday before rebounding to 1.26% on Wednesday. The yield had been as high as 1.75% just a few months ago.
“So you can see multiple reasons for a second half rally, and we expect this to be led by epicenter stocks,” Lee concluded, adding that his favorite sectors remain energy, technology, and basic materials.