TOM LEE: In Five Years, I Think The Dow And S&P 500 Will Double

SAM RO

 OCT. 20, 2014

Bloomberg TV

Tom Lee

“I think the S&P and the Dow in five years will actually double,” Fundstrat’s Tom Lee said.

Lee told Bloomberg’s Tom Keene on Friday that he expects earnings on the S&P 500 to peak near $190 per share from around $120 today.

He expects earnings growth to be accelerated by a pick up in investment spending, a theme that many economists have been forecasting.

Business equipment has been getting old and companies have the cash to spend. Indeed, spending plans haven’t been this high in years.

In recent weeks, volatility has spiked in the markets, bringing the S&P 500 down from 2,019 on September, 19 to 1,862 when Lee spoke to Keene.

A doubling of the S&P 500 means Lee expects it to top out at north of 3,700. That’s even more bullish than the long-term bullish calls recently offered by Morgan Stanley’s Adam Parker and RBC’s Jonathan Golub.

Lee does recognize there are risks out there.

“What could go wrong?” he asked rhetorically in a note to clients on Friday. “In our view, we believe the greatest risk is a spillover into the global economy from the recent financial market dislocations. That is, an unwind of carry trades result in higher Euro-area funding costs then transmitted to US banks as financial stress. However, the offset remains supportive Central Banks that are closely watching. “

Wall Street Bull Tom Lee Has An Unusual Way Of Illustrating How Long-Lived Bull Markets Evolve

SAM RO

 SEP. 25, 2014

Earnings and expectations for future earnings are what drive stock prices in the long run.

The premium investors pay for those earnings, however, fluctuate over time throughout stock market and profits cycles. And that premium is commonly measured by the price-earnings ratio.

In a new research note, Fundstrat Global Advisors’ Tom Lee illustrates how price-earnings ratios move during long bull markets. Specifically, he does so by taking the ratio of the price divided by the peak earnings level of the cycle.

The chart may not be immediately intuitive for most people as it reflects a moving price (P) and a static peak level of earnings (E).

It does, however, do a decent job of showing how high P/Es will get and how long it takes for stocks to get to that peak.

Lee believes the historical patterns provide a precedent for what could be many more years of gains in the stock market.

Arguably one of the more aggressive bulls on Wall Street, Lee sees S&P 500 earnings peaking at $154 from the $118 level we’re at today.

“In Figure 4 below we have plotted the current bull market P/E using our implied peak earnings of $154 against the prior long lived bull markets,” Lee writes. “The S&P 500 is currently 12.9x ($154 peak) and prior bulls peaked at an average of 17x. If we apply the 17x average to our $154 estimated peak earnings we get a peak S&P 500 value of 2600 at just the “average”.”

Keep in mind that Lee’s $154 is a forecast.

Fundstrat Global Advisors