If you're digging today's rally you're going to have the best holiday season EVER, at least according JP Morgan's chief U.S. equities strategist Tom Lee. Lee was on Breakout on October 14th predicting a big gain for the S&P 500 in 2011. Since that time stocks are down about 9%, including today's rally, yet Lee is undeterred. His year-end target is 1,350 and he's sticking with it.
"Just two weeks ago we were 100 points higher," observes Lee. "So the idea of seeing a 1,350 rally is really the idea that the last two weeks is recovered and then the market starts thinking about where the relative value is."
For Lee, the most important factor investors should note is the way strong corporate profits in the U.S. are decoupling from what's going on in Europe.
The strategist thinks his $105 earnings estimate for 2012, corporate bonds yields twice as high as the 10-year Treasury, and tremendous balance sheets add up to a market which "should" be trading at 1,500. That is, of course, as long as the situation in Europe "doesn't get too much worse."
Lee's price target relies less on public enthusiasm for stocks than it does corporate America's unprecedented appetite for their own equities. "U.S. companies are the biggest buyers of stock, not really retail investors," he says, noting that companies are "returning $750billion to investors this year." With 11% of the S&P500's assets currently in cash, "the highest level in 60 years," the buyback rate is increasing with the market's decline.
The rally is going to be led by cyclical groups like consumer discretionary, technology and "even financials," according to Lee. For what it's worth, the tech heavy Nasdaq 100 (^NDX) and the main SPDR Consumer discretionary ETF (XLY) are roughly flat for the year, and the SPDR Financial sector ETF (XLF) is down well over 20%. Clearly all sectors are not created equally.
There's Lee's case for a rip roaring year-end rally. No doubt it's a view sure to inspire rather strong opinions. Share your take with us on Facebook or in the comment section below.