Tom Lee raises 2021 forecast for the S&P 500, but warns of a tumultuous July

Published Wed, Jun 30 20219:49 AM EDTUpdated Wed, Jun 30 202111:40 AM EDT

Fundstrat's Tom Lee just hiked his S & P 500 forecast for the end of the year, but warned July could be a rough ride. Lee — known for correctly predicting the stock market's dramatic ups and downs during the pandemic — now expects the S & P 500 to reach 4,600 by the end of 2021, up from his previous forecast of 4,300. The new level implies a more than 7% rally for the second half with the 500-stock average sitting around 4,290. Lee expects the economy to continue to gain momentum, earnings to keep beating estimates, strong credit and stable rates, the Federal Reserve to stick with its easy policies, fiscal stimulus from the White House and a normalizing of volatility. The S & P 500 is up more than 14% this year, which Lee notes would be a solid gain for a full trading year, let alone six months. However, Lee noted that historical data shows that "strong markets stay strong." Data shows that second-half returns are the strongest in years when the first half is also the strongest. "In fact, since 1928, and ex-recessions (more impressive), this ranks as nearly one of the 10 best ever starts (technically would be #11)," Lee told clients. The new Covid delta variant as well as the potential for a choppy July are the two main reasons for investors to say on their toes in this market, Lee said. However, he added that the delta variant shouldn't cause another series of economic lockdowns. Rocky July? Fundstrat's data analysis also shines light on the potential for a tough July. "July could be a brutal month," Lee said. "July returns are actually mostly poor and July returns are worse when 1H is strong." When the S & P 500 is up more than 13% in the first half, the month of July typically yields a return of just 0.4%, according to Fundstrat. Plus, the index posts a gain in July only 50% of the time. "So July has a lower probability of rising and a lower overall return when 1H is > 13%. This could be seen as a form of market payback. So we would default to expecting July to be somewhat choppy," added Lee. Stock picks from Lee Despite what could be a tumultuous July, Lee is sticking with his trusty group of "epicenter" stocks to finish out the year. The epicenter list is a group of companies that were hard hit by the coronavirus pandemic that Lee sees continuing to lead the market comeback. Names like Uber , Advance Auto Parts, Best Buy , MGM Resorts , Hilton Worldwide , Marriott International, Norwegian Cruise Line , Royal Caribbean , Gap and General Electric are so-called epicenter stocks. Fundstrat forecasts epicenter stocks will drive about half of the gains in the second half. The rest should be lead by energy and technology stocks. Lee noted Amazon, Apple and Visa are up 6%, 2% and 4%, respectively, in 2021. But "if the S & P 500 is up +23% for the full year, shouldn't some of these stocks have double-digit gains?," Lee asked. "If so, then FAANG/Technology will play a big role in the points gained in 2H2021." Fundstrat also likes Amazon , Alphabet , Tesla , Biogen , Apple , Microsoft , PayPal , eBay , Micron and Nvidia in his "Granny shots" basket of core stocks based on thematic and tactical portfolios.

Tom Lee, Fundstrat Global Advisors

Scott Mlyn | CNBC

Fundstrat's Tom Lee just hiked his S&P 500 forecast for the end of the year, but warned July could be a rough ride.