- Bloomberg TV
Fundstrat’s Tom Lee is worried about the stock market after being one of its biggest bulls for eight years.
In a note sent to clients on Friday, Lee said several factors that had supported his views on the market, including attractive valuations and central-bank support, had turned neutral or possibly negative.
“Many of these factors have become neutral and potentially headwinds,” Lee said.
“We see the conditions in place for a 1H drawdown, although our original 2150 target does seem awfully hard to reach – we now look for equities to pullback to 2200-2225 in 1H,” he said, referring to the first half of 2017. The S&P 500 closed at 2,345.96 on Thursday.
The negative factors for stocks include that the price-to-earnings ratio of stocks – one measure of how expensive they are – is now higher than it was in 2000 and 2007, before the last two big crashes.
With the median P/E ratio at 19 times earnings, the likely scenario is a 5% to 8% drop in stock prices to bring them more in line with earnings growth. Lee said it was unlikely that earnings per share for companies would be revised sharply higher.
Lee also saw the drop in bond yields and a flatter yield curve as suggesting that economic growth may slow, adding to why he’s no longer as bullish on the market.
“We do not believe a ‘bear market’ is around the corner, as we believe there remains substantial pent-up demand, given investment spending is still near 50-year lows and deregulation is supportive of transforming earnings for financials, energy and manufacturing,” Lee said.
After postponing on Thursday, House Republicans are expected to vote on the American Health Care Act, the bill to reform the US healthcare system, on Friday. The bill’s passage is seen as a precursor to items on Trump’s economic agenda, including tax cuts, the prospect of which helped lift stocks to new highs after Trump’s election.