Here's why the disappointing earnings don't matter

rising stocks
Jose Luis Pelaez Inc. | Getty Images

The S&P 500 keeps inching toward a new high despite disappointing earnings from big-name stocks like Microsoft and Alphabet. How can that be?

One Wall Street strategist has an interesting theory: International investors facing super low — even negative — yields on bonds at home are choosing to park money in U.S. stocks, an asset class they view as able to provide higher returns for relatively low risk. U.S. bond investors are rotating into stocks as well, he said.

"Falling yields globally are driving investors into U.S. assets," Fundstrat's Thomas Lee wrote in a note to clients Friday. "U.S. companies tend to be higher quality overall (more blue chips) as well. Hence, we see the case for U.S. assets to reflate, boosting equities."

The strategist cited Japan's 10-year bonds trading at a negative yield, German government bonds yielding 0.23 percent and a U.S. 10-year Treasury yield at 1.87 percent as of Thursday. Lee states this is the first time the S&P 500's dividend yield at 2.2 percent is higher than the U.S. 10-year since the 1950s. With such a disparity between global bond yields versus domestic stocks, Lee believes investors will continue to shift toward U.S. equities.

Lee also sees the rally in high-yield bonds, up more than 5 percent this year as of Thursday, and high-yield bond ETF flows turning positive since early March as good signs for a further rally in the market.

Here are specific stocks the firm recommends in their "stocks are the new bonds" strategy.

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