The S&P 500 will surge 16% in 2021 as pent-up demand leads to strong GDP recovery, Fundstrat’s Tom Lee says

• US stocks are set to continue their bull run in 2021 as pent-up demand due to the COVID-19 pandemic leads to a stronger-than-expected recovery in GDP, according to Fundstrat.
• In its 2021 outlook released on Thursday, Fundstrat’s Tom Lee outlined how the S&P 500 could surge 16% to 4,300 by the end of next year.
• Besides a surge in demand from consumers that could be sparked by a “pandemic finale,” declining volatility and low interest rates are also supportive of the stock market, Lee said.
• Detailed below is Fundstrat’s roadmap for the stock market in 2021, which includes an expected first quarter sell-off of at least 10%.
• Visit Business Insider’s homepage for more stories.

Investors should get used to a rising stock market in 2021 as pent-up demand helps drive a better-than-expected recovery in the economy, according to Fundstrat’s Tom Lee.

In its 2021 outlook note released on Thursday, Fundstrat outlined a roadmap for the stock market in 2021 that includes a 16% surge in the S&P 500 to 4,300 by year-end.

“Pent-up demand and massive ‘relief’ and celebration of pandemic finale could lead to a substantially stronger than expected GDP recovery,” Lee said.

That latent consumer demand that’s stemmed from the COVID-19 pandemic shouldn’t come as a surprise given that China has staged a strong economic rebound after they got the virus under control, he added.

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Also supportive of equities in 2021 will be continued low interest rates and a continued decline in volatility.

Fundstrat said expected real interest rates of negative 6% in 2021 and 2022 will represent the lowest level in more than 60 years. Real interest rates are derived from the nominal interest rate adjusted for the expected inflation rate.

Those low rates are a "massive tailwind" for asset heavy companies and could lead to strong outperformance of cyclical stocks over growth stocks, according to Fundstrat. 

But the S&P 500's path to 4,300 won't be a straight line higher. Instead, according to Lee, investors should expect a 10% correction sometime between February and April that drives the S&P 500 to the 3,500 level. 

"Equities need to work off overbought conditions before mid-year," Lee said, pointing to heightened relative-strength-index levels and a sharp increase in bullish investor sentiment.

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A 10% correction is in line with the first 12 to 18 months of price action in past bull markets across history, according to Lee. 

In terms of which stocks to own for 2021, Lee highlights companies within the consumer discretionary, industrial, and energy sectors.

And if we are indeed at the start of a new bull market for stocks that mirrors the prior bull market runs of 1982 or 2009, the S&P 500 could hit 10,000 by 2030, according to Fundstrat. That would represent a compounded annual growth rate of just under 15%.

Millennials will likely drive that move higher in both the stock market and the economy as that generation is only now beginning to buy homes, which represents a sizable driver of business in the US. 

"If this is a new bull-market, then stocks should have a very impressive decade of total return," Lee said.

Read more: Fund manager Brian Barish has returned more than 550% to investors over 2 decades, and he just had 2 of his best years ever. He told us how he did it - and 3 top picks for the next 5 years.

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