Strategist who called market bottom sees more gains ahead as 'epicenter' stocks are set to rally

Published Fri, Aug 14 20201:57 PM EDT

Tom Lee, head of research at Fundstrat Global Advisors, thinks the S & P 500 is primed for another leg higher led by stocks benefiting from the economy reopening. Lee hiked his S & P 500 price target to 3,525 on from 3,450 on Thursday night. His new target implies an upside of 4.4% from the S & P 500 previous close of 3,373.43. The S & P 500 has never traded above 3,400. His call came after a massive rally off the March low — which he called — that left the S & P 500 a stone's throw away from its Feb. 19 intraday record of 3,393.52. Since hitting an intraday low on March 23, the S & P 500 is up more than 50%. Those gains have been largely led by growth stocks, especially the major tech names. But Lee thinks this next stage in the rally will be led by the "epicenter stocks," a group of companies that have been hard hit by the coronavirus pandemic. These companies include cruise line operators, casinos and airlines, he said. "The upside is going to come from the epicenter stocks," Lee told CNBC's " Halftime Report " on Friday. "These companies have massively rationalized costs. A lot of these companies are making money at 30% of their sales for 2019, including casinos and cruise lines. So, if we get a recovery or a vaccine or a drop in cases, there's a lot of operating leverage in the epicenter stocks." Both Wynn Resorts and MGM Resorts more than doubled from their March bottoms to their June peaks. Since then, however, both stocks are down at least 9%. Cruise operators Carnival and Norwegian Cruise Line have seen a similar trading action over those time periods. The rally in those stocks was halted as traders turned back to the safer growth names amid a second spike in coronavirus cases. The virus resurgence raised questions about the state of the economy as it forced parts of the U.S. to reverse or halt plans to reopen businesses. But as the number of new cases stabilizes, Lee thinks the market will get another boost from its current level. "We looked at what happened in April and May, when cases began to roll over substantially," Lee said. "It took 20 days from that peak in cases before investors were convinced the trend changed and they began to buy the epicenter stocks, which rallied 30% in that time." "We're looking at this situation thinking an epicenter rally should take 20 days [to start]. People are going to be skeptical, thinking 'I don't want to be fooled twice,' but this is going to be meaningful because we know the economy has bottomed now, there aren't many states seeing a super-spreader event, and the New York tri-state area has really kept it under control," Lee added. Lee was one of the first to call the market's blistering rebound off the late-March low. In early April, he said "faster you fall, the faster you recover," noting the market usually recovers half of its losses in half the time it took to fall. See the full interview above.

Tom Lee, Fundstrat Global Advisors

Scott Mlyn | CNBC

Tom Lee, head of research at Fundstrat Global Advisors, thinks the S&P 500 is primed for another leg higher led by stocks benefiting from the economy reopening.

Lee hiked his S&P 500 price target to 3,525 on from 3,450 on Thursday night. His new target implies an upside of 4.4% from the S&P 500 previous close of 3,373.43. The S&P 500 has never traded above 3,400.

His call came after a massive rally off the March low — which he called — that left the S&P 500 a stone's throw away from its Feb. 19 intraday record of 3,393.52. Since hitting an intraday low on March 23, the S&P 500 is up more than 50%. Those gains have been largely led by growth stocks, especially the major tech names.