The S&P 500 could jump 9% by year-end as a reversal in interest rates drives a rebound in the struggling reflation trade, Fundstrat’s Tom Lee says

Cindy Ord/Getty Images

The S&P 500 could surge 9% to 4,700 by year-end, Fundstrat’s Tom Lee told CNBC on Friday.Lee sees a renewed surge in interest rate on the horizon, with the 10-year drifting towards 1.75%.That reversal in interest rates should drive cyclical stocks higher, according to Lee.Sign up here for our daily newsletter, 10 Things Before the Opening Bell.The stock market is on track to continue its uptrend and surge as much as 9% by year-end, Fundstrat’s Tom Lee said in an interview with CNBC on Friday.
Lee said the S&P 500 could surge to 4,700 by year-end as "strong markets stay strong," representing potential upside of 9% from Thursday’s close. That move higher will likely be driven by cyclical stocks as interest rates drift back towards their recent cycle-high of 1.75%.
Since the start of June, the 10-Year US Treasury rate has fallen to as low as 1.27% as investors question the durability of the post-pandemic economic recovery and expectations of higher inflation. The drop in rates helped fuel a rotation out of value and into growth stocks, but according to Lee, rates and growth stocks could begin to rise together as they become "detached" from their often inverse relationship.
"I think FAANG is going to detach itself from interest rates, meaning they’re going to have a great second half, not because rates are going to fall, but because these are great companies that almost did nothing during the first half [of 2021]. We think if the S&P 500 ends the year up 25%, and a lot of these FAANGs are up 5%, they could be up 20% in the second half, that makes them an overweight," Lee told CNBC.
While Lee believes mega-cap tech stocks in the "FAANG" group can continue to perform well, epicenter stocks tied to the physical reopening of the economy will be best positioned for more upside.
"Epicenter stocks will rally strongly, as they are the most sensitive to rising rates," Lee said in a note on Friday.

Fundstrat

And within epicenter stocks, Lee has the most conviction on the energy sector, as bullish divergences between energy stocks and oil prices continue into the back half of the year. Lee sees a potential squeeze in the supply of oil occuring just as the economy gets back on its feet and demand is high, likely leading to a continued uptrend in prices.
"[Oil] Supply will get even tighter into 2022 as the $300 billion in shortfall in capex past 24 months robs future production capacity," Lee explained. Those potential supply constraints come as OPEC members fail to reach a deal on an expected production increase.
"Bottom line: If interest rates reverse, buy epicenter which is gonna rally most," Lee concluded.

Read the original article on Business Insider

Source: https://www.businessinsider.com/stock-market-outlook-sp500-upside-interest-rates-rise-tech-epicenter-2021-7

Join the Discussion

  • BrokerEUR/USD
    FX Pro 0.91pips. (variable) margin: 3.33%
    City Index 0.5pips (fixed) margin: 3.33%
  • Back to top