Fundstrat's Tom Lee recommends investors buy stocks, predicting sales growth turning positive after six declining quarters will spur a market rally.
"We see 3Q16 as a positive catalyst, marking the end of the earnings recession. The bottom line, in our view, is that we are seeing the positive turn in sales," Lee wrote in a note to clients Friday. "Central to our positive stance on equities in 2016, is the view that 3Q16 would mark the turning point for earnings (oil fade, USD fade, etc.) and indeed, 3Q16 is shaping up to be a key inflection point."
The strategist cited how in the last 25 years when corporate sales growth turns positive after long periods of declining growth, the bullish momentum always continues. He sees corporate revenue increasing 2.5 percent year over year in the third quarter.
Sales upturns are followed by earnings growth improvement four out of four times since 1990, according to Fundstrat. Lee also forecasts an incremental $11 to $14 S&P 500 earnings per share in the coming year due to the better corporate profit margins. Corporate earnings will be able to benefit from the "high altitude training" in the recent difficult macro environment, the strategist said.
"With revenue growth accelerating higher, oil stabilizing, USD headwinds fading, we believe US corporates will surprise on EPS," he wrote.
Fundstrat favors small caps over large caps and value stocks over growth stocks. In terms of sectors, the firm has overweight ratings on the materials, consumer discretionary, technology, energy, financials and telecom industries.
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