- The S&P 500 has more room to run, according to a Thursday note from Fundstrat’s Tom Lee.
- Lee upped his year-end S&P 500 price target to 3,800 from 3,525, representing potential upside of 7% from Wednesday’s close.
- Here are 10 reasons why Lee expects the S&P 500 to continue its record climb over the next 6 weeks, according to the note.
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The stock market’s record post-election rally will continue into year-end, according to Fundstrat’s Tom Lee.
In a note on Thursday, Lee upped his year-end S&P 500 price target to 3,800 from 3,525, representing potential upside of 7% from Wednesday’s close.
Lee is not surprised to see stocks consolidate over the past few days, and understands why some investors might believe that stock market has become “overly exuberant.”
But according to Lee, an expansion in earnings multiples could drive new gains over the next six weeks. In his note, he gives the 10 following reasons.
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1. “COVID-19 vaccine and therapeutics take ‘worst case [scenario]’ off table.”
2. “Policymakers are pursuing soft-lockdowns, not killing recovery.”
3. “Pent-up demand is US, look at output gap.”
4. “China seeing massive explosive economic recovery.”
5. “Fiscal stimulus coming.”
6. “Investors are cautiously positioned, with little conviction.”
7. “$4.5 trillion cash on sidelines.”
8. “If VIX breaks below 20, double-risk on signal.”
9. “Santa Claus rally.”
10. “Fed dovish.”
“With tailwinds for P/E expansion, we see 2021 P/E rising to 19.7x from 18.3x, which would lead to S&P 500 3,800,” Lee said, basing his target on estimates that the S&P 500 notches record EPS of $193 in 2021.
A 7% move higher into year-end is about the magnitude of a typical Santa Claus rally, “so we are saying markets see their typical seasonal gains” over the next six weeks, the note said.
And a P/E valuation multiple of 19.7x is not demanding for the S&P 500, considering that it’s a discount to the current implied P/E multiple of high-yield bonds. High yield bonds are currently priced at an implied P/E multiple of 20.6x, Lee explained.
“If the S&P 500 traded at 20.6x, the S&P 500 would be 3,976,” Lee said.
Year-to-date, the S&P 500 is up 10% as of Wednesday’s close.
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