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The inventory market has three tailwinds that might drive additional upside to report highs, in keeping with Fundstrat’s Tom Lee.
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Lee highlighted elevated company earnings and an absence of margin debt as causes to remain bullish.
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“It is simply that there are such a lot of prime callers now that I believe that is why there’s nonetheless gasoline within the tank on this rally,” Lee mentioned.
Fundstrat’s Tom Lee nonetheless expects the inventory market to proceed its surge to report highs, in keeping with a Friday interview with CNBC.
Lee mentioned that whereas there was some ongoing profit-taking within the inventory market even after a strong February jobs report, there are three causes to anticipate additional upside from right here.
These embrace strong earnings outcomes, a Federal Reserve that’s set to chop rates of interest later this yr, and an absence of risk-on habits from traders.
“There’s upside to earnings,” Lee informed CNBC. “Earnings beat by 7% within the first quarter, so that you’re already one quarter in and if consensus is $245, which means there could possibly be ten {dollars}, 15 {dollars} of upside for simply this yr on earnings alone.”
And whereas company earnings proceed to rise, valuations do not seem too stretched, in keeping with Lee, offering gas for additional upside in inventory costs.
“On threat premia, which is what you need to put at a P/E a number of, effectively if the Fed begins chopping and the financial system is resilient, the P/E is simply 15x ex-FAANG,” Lee mentioned.
Even with the inclusion of mega-cap tech shares, the S&P 500 trades at a ahead P/E a number of of 20.7x, which is simply barely above its five-year common of 19.0x, in keeping with knowledge from FactSet.
Lastly, Lee mentioned that traders will not be displaying the kind of risk-on habits usually current on the prime of market cycles.
“There’s nonetheless $6 trillion in money on the sidelines. Margin debt has barely budged, it is under the place it was in October 2023 which was just some months in the past, so I do not suppose traders are essentially that risk-on. I imply I do know the market is technically overbought, however Mark Newton, our head of Technical Technique, says you do not actually need to be utilizing overbought as a promote sign as a result of sturdy markets keep sturdy,” Lee mentioned.
And the shortage of margin debt held by traders finally signifies that sell-offs could also be short-lived as traders search to purchase the decline.
“When leverage is low, like margin debt, it means traders aren’t lengthy but the backdrop is enhancing, so which means they’ve to make use of these pullbacks as possibilities to get lengthy,” Lee defined.
Lee has warned that the upcoming February CPI report might spark a short-term sell-off within the inventory market to the magnitude of seven%, however finally, with so many traders trying to name a prime, Lee sees the trail of least resistance being larger for the inventory market.
“It is simply that there are such a lot of prime callers now that I believe that is why there’s nonetheless gasoline within the tank on this rally,” Lee mentioned.
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