Long-term Investing

Stocks could 'head fake' as much as 5% lower: Lee

Next bear market will coincide with a recession: Strategist
Next bear market will coincide with a recession: Strategist

The stock market could pull back as much as 5 percent if the Federal Reserve starts to taper its massive bond-buying program in December, JPMorgan chief U.S. equity strategist Thomas Lee told CNBC on Tuesday. But he said he thinks "it all ends up being a head fake," and investors should be prepared to buy any dips.

"At the moment we're slow buyers," Lee said in a "Squawk Box" interview. "It's tough to say the market is going to jump another 10 percent from here" by the end of the year.

Stocks were mixed in early trading Tuesday, after the closed Monday just shy of another record high—only about 3 points away from Lee's year-end target of 1,775.

Investors have been looking for cues from the Fed on when it might scale back its $85-billion-a-month in bond-buying. Policymakers meet next month, but most economists think tapering won't happen until early next year.

(Read more: Stocks could keep trotting before Turkey Day)

Lee said that next year will be a "battleground" on whether earnings growth can continue. "This year, second half, earnings are growing single digits. I think there's also room for [price to earnings] expansion."

"It turns out that in the fourth quarter, it's a really good strategy to buy companies that raise [earnings] estimates," he added.

Lee has been bullish since 2009, and he's not ready to take profits yet because he sees more gains ahead.

"Even with a rising 10 year [Treasury yield] to 4 percent, a 16 or 17 [PE] overall is a fair multiple" for the S&P, he said. "We're barely above 15 on forward [earnings]."

He sees opportunities in low PE, mega-cap tech names like Microsoft, IBM, Cisco Systems, Oracle, EMC, even Hewlett-Packard—saying more than half the group are "under 12 [times earnings]."

"It reminds of the pharma trade a few years ago. People looked at these low multiples, these cliffs, and thought it wasn't worth buying. And then they were great stocks," he said.

Thomas Lee, co-founder of Fundstrat Global Advisors
Adam Jeffery | CNBC

Will there be a point when Lee sours on the market? "We are looking at this through the lens that we're in a secular bull market, which means the next bear market will coincide with the [next] recession," he said.

"It's hard to think we'd be in the conditions for a recession," he continued. "Recessions are usually monetary-tightening events, commodity shocks, usually preceded by an inverted yield curve."

(Read more: Stocks are cheap, only up 10% since 2007: Ron Baron)

In all the taper talk, the Fed has maintained that buying fewer bonds each month would not be tightening because policymakers plan to keep short term interest rates low for the foreseeable future. That concept has been a tough sell for the markets.

(On the other hand, see: Fed's Richard Fisher: QE won't go on forever)

By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.