Strategist Lee says 2016 is like 1991, when investors doubted a market that went on to quadruple

Tom Lee
Adam Jeffery | CNBC

Fundstrat's Tom Lee reiterated his bullish equity stance, saying the current environment reminds him of a specific year when a bull market paused before a massive multiyear rally.

"Recalling why 1991 shows after 8 years of a bull, you need to embrace the rotation," Lee wrote in a note to clients Friday.

"At end of 1991, pundits and investors were skeptical of equities — noting high P/E, lack of benefit from 11 rate cuts, IPOs — perhaps not surprising given the stagflation that marked the previous decade. But that sure sounds like today … doesn't it?"

The strategist cited how 1991 was the eighth year of a bull market with a total gain of 222 percent, similar to the 231 percent rally from 2009 to 2016. Lee noted the 1980s run was primarily driven by a price-to-earnings multiple expansion from 10 times to 27 times, similar to the current rally when the multiple rose from 11 times to 19 times.

He said after nearly a decade of falling inflation through 1991, corporate investment spending started to increase as interest rates stabilized, which eventually led to strong profit growth. From 1991 to 1999, the rose 271 percent, driven by the rise in earnings. The benchmark's earnings-per-share increased from $16 to $50 in that time period.

In similar fashion, 1991 was a key turning point in the sector rotation cycle. Lee said market leadership shifted from defensive sectors such as health care and consumer staples to cyclical stocks the next eight years.

As a result, if the same post-1991 scenario plays out, it will be bullish for the market and certain sectors, according to the strategist.