- The S&P 500 is primed for a 10% rally by the end of June following a bullish breakout to the upside on Thursday, according to Fundstrat's Tom Lee.
- A breakout in the S&P 500 is taking place as the stock market's volatility index is breaking down, which represents "double confirmation" of an imminent market rally, Lee said.
- Lee recommends investors buy cyclical stocks in the energy and financial sectors that are poised to benefit from a swift reopening of the US economy.
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The stock market is poised to extend its recent rally following an upside breakout in the S&P 500, Fundstrat's Tom Lee said in a note on Friday.
Lee expects the S&P 500 to surge 10% to 4,300 by the end of June, before any potential correction materializes, according to the note. Lee said Thursday's record highs in the S&P 500 occurred as the Cboe Volatility Index – or VIX, also known as the stock market's fear gauge – is on the decline. To him that represents "double confirmation" of the move higher in stocks.
Over the past year, periods of consolidation in the S&P 500 have been followed up by 10% rallies, Lee observed in the note. From June to July and from September to November, the S&P traded flat before jumping 10% after a breakout in its respective trading range.
According to Lee, the technical breakout in stocks does come with a favorable fundamental backdrop that will help drive the market higher.
Those fundamental drivers include COVID-19 retreating faster than expected, resulting in a faster re-opening of the US economy, pent-up demand and operating leverage that could be greater than expected, and interest rates could stabilize or even fall, the note said.
"We think there will be fundamental surprise in the coming months," Lee said.
To take advantage of the expected move higher in stocks, Lee continues to recommend investors buy cyclical stocks in the energy and financial sectors that are poised to benefit from a swift reopening of the US economy.
But the expected 10% rally higher in the S&P 500 won't happen overnight, with Lee setting expectations that the next seven to 10 trading days could be flat as stocks "catch their breath."
