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Citi Strategist Sees Market Moving Higher This Summer

The summer forecast for stocks is higher, says Citigroup chief U.S. equities strategist Tobias Levkovich.

"Both the valuations and volatility measures are pointing to a higher market. You've lost some of the impetus, but we'll probably grind higher through the summer," he said.

"It's more of two steps forward and one step back," Levkovich said in an interview after his

appearance on Squawk Boxthis morning. As the third quarter starts, he says there is still plenty of cash on the sidelines, but it is more likely to now "dribble" into stocks after the gains made since early March.

The strategist also says the market's widely anticipated "pull back" may not materialize and the market may have caught its breath with the sideways move stocks made in the last couple of weeks. "We call it the pause that refreshes," he said.

For some investors, the second quarter earnings season has loomed as a potential negative for the market, but Levkovich thinks otherwise. Second quarter earnings are expected to be down 34 percent for the S&P 500.

"I think companies are going to try to be cautiously optimistic," he said. He sees one big positive coming in that companies should start to show that production is picking up, one of the biggest drivers of earnings and something investors will see as a positive for stocks.

"We've seen the collapse in production in fourth quarter and first quarter that can't be sustained," he said. "Companies have to take up production...It's not inventory destocking. It's destocking at a slower pace." Citigroup economists have forecast that July could be the first month of the year showing growth in industrial production, and they expect third quarter GDP to show growth of a half percent.

Levkovich pointed to the auto industry as an extreme example, where production collapsed, but will now pick up, creating a ripple effect for suppliers and others. U.S. auto production is below four million units a year currently, and final demand is better than 7 million units. "You could take automotive production up by 75 percent and not add to inventory," he said.

He also points to history in making a case for stocks to move higher this summer. Since 1921, "88 percent of the time when we've had a recovery occurring, the sell in May theory doesn't work," he said.

Levkovich's forecast for year end is 1,000 on the S&P 500, and he says there's a chance it could overshoot to 1,100 or so, at which point he'd take some profits.

But is this really a bull market, or just a sleeping bear? "We can argue cyclical bull market, but not secular bull market" where you break above market highs, he said.

Several other positives he mentioned are the impact of healing credit markets, and the impact

on consumers of the stock market's rally.

Companies have been able to tap the capital markets, and record amounts of new debt has been issued in the last several months. "When companies raise money, they tend to spend it, and we think that'll start to come in during the second half," he said.

Consumers too could be a positive, despite the forecasts for an American consumer that hordes cash and only buys the basics. The top 20 percent of income earners are disproportionately large owners of stocks. This group is less dependent on real estate valuations and feels wealthier when the market is moving higher. "These consumers are so much more driven by what happens in stock prices," he said. The top 20 percent also make up more than 40 percent of all consumer spending.

Levkovich's favorite sectors include capital goods, energy, diversified financials and in technology, software and services.

Questions? Comments? marketinsider@cnbc.com

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