Convinced that the "gauntlet" of bad data is over and the Greek debt crisis is "largely behind" us, JPMorgan Chase is looking for a "summer of cyclicals" that will push the U.S. stock market higher by 6 percent in just the next two months or so.
Thomas Lee, the firm's chief equity strategist, believes that the spate of weak economic news is largely at an end and will be better than expectations in coming weeks.
His prediction looked smart Friday, when the June Institute for Supply Management numbers easily beat estimatesand had some convinced that the economy indeed had hit a mere soft patch and would soon turn around.
In fact, the ISM performance may have been even better than Lee's already-rosy projections.
"We expect incoming data to begin surprising to the upside by mid-July, as Japan’s V-shape bounce and the oil squeeze end. But markets seem to be somewhat looking ahead, as equity markets have shown resilience recently," he wrote in an analysis for clients.
The recent conditions, he said, were reminiscent of 1992, when markets also were confronted by lack of a federal budget, an effort to reform the health care system and the formation of an economic experiment called the European Union.
Of course, conditions back then weren't quite the same. The U.S. didn't have a debt-to-gross-domestic-product ratio approaching 100 percent, the EU wasn't facing the possibility of collapse due to a systemic debt problem and unemployment then was 7.6 percent as opposed to 9.1 percent now.
Still, Lee expects cyclical stocks to outperform defensives this time around just as they did then. The result, he says, will be the S&P 500 at 1400 by September.
He notes that cyclical stocks—i.e., autos and other discretionary items that react more acutely to the ups and downs of the economy—are underperforming defensive stocks, such as health care and consumer staples this year.
That underperformance "reflects the downturn in economic momentum in (the first half) and the associated loss of visibility. However, fundamentals and valuations are very supportive for cyclicals, supporting outperformance" in the second half, Lee said.
As criteria for his recommendations, Lee sought stocks that dropped at least 10 percent from their peak, showed fundamental improvements and were attracting interest from short sellers.
Here, then, is his basket of cyclical stocks for growth in the quarter ahead: