The Tell: A stock-market pro offers 10 reasons the S&P 500 can surge another 7% before 2020 ends

The Tell: A stock-market pro offers 10 reasons the S&P 500 can surge another 7% before 2020 ends

21 Nov    Finance News

Thomas Lee, founder of Fundstrat Global Advisors, says that the S&P 500 has more in the tank before the end of 2020 and has therefore upped his year-end target to 3,800 from 3,525.


In fact, the prominent strategist on Thursday estimated that the recent rally in stocks, partly prompted by the completion of the 2020 U.S. presidential election and positive news on vaccines, isn’t finished. He envisaged a further 7% tailwind for stocks headed into the next five weeks.

Lee acknowledges that the market has enjoyed a furious run-up in November thus far, with the Dow Jones Industrial Average DJIA, -0.74% and the S&P 500 index SPX, -0.67% on track for the best November return since 1938, but thinks that equities can score a further boost.

“And not surprisingly, there are more than a few who believe markets have become overly exuberant…That said, we see tailwinds for P/E into year-end, and while upside to earnings revisions is muted for now (we are done with 3Q2020 EPS), we believe risk premia can fall = P/E expansion,” he wrote, referring to possibility for further gains in prices for stocks even if estimates for earnings don’t rise.

Lee makes the argument that the stock market’s will rise based on these 10 reasons:

1. COVID-19 vaccine and therapeutics take “worst case” off table. 
2. Policy makers are pursuing soft-lockdowns, not killing recovery
3. Pent-up demand in 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. $4.5T cash on sidelines
8. If VIX VIX, +2.55% breaks below 20, double-risk on signal
9. Santa Claus rally
10. Fed dovish

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Lee sees the bulk of the gains coming from so-called epicenter stocks, which have mostly lagged behind the rest of the market and may benefit from an improving economic outlook and progress achieved on the vaccine and therapeutic front.

On Thursday, the stock market was wobbling, with stocks within the Nasdaq Composite Index COMP, -0.41% drawing bids as investors fretted about a resurgence of the COVID-19 pandemic. The Nasdaq was up 0.5%, while the S&P 500 was down 0.1% and the Dow was off 0.3%.

The S&P 500 is already up 10.1% so far this year, the Dow has produced a 2.7% year-to-date gain, while the Nasdaq Composite has surged nearly 32% thus far in 2020.

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