(Bloomberg) -- The fourth-quarter U.S. equity sell-off was nothing more than a “mid-life crisis” that set the stage for further gains in the market, according to Tom Lee, the co-founder of Fundstrat Global Advisors LLC.
The S&P 500 Index will rise 13 percent this year to 2,835, driven by a continued profit expansion, Lee said. Earnings will increase to $169 a share in 2019 and $183 next year, he predicted.
Lee’s optimism echoes Wall Street strategists calling for a big comeback after stocks fell to the brink of a bear market in December. To Lee, the latest rout was reminiscent of two other episodes, in 1962 and 1987, when a sell-off sent the S&P 500 to its 200-week moving average price and proved only an interruption to a prolonged bull market.
This time, “stocks overshot to the downside, on the heels of a cumulative panic around mounting trade tensions, excessive bullishness and then a knockout blow from the Fed,” Lee wrote in a note to clients. “Unless the U.S. is headed for a recession, this should lead to a bounce in stocks in 2019.”
For now, history is on the bulls’ side, judging from the Institute for Supply Management’s manufacturing index that has called the tune of past market turmoil, according to Fundstrat.
In addition to the one that happened at the end of last year, the S&P 500 had posted ten other declines of 19 percent or more over 60 days since World War II. Three of them were accompanied by the manufacturing index sitting below 50, an indication of contraction, and stocks eventually plunged into bear markets. The others coincided with expansions and the market ended up faring well. The measure’s latest reading was 54.
Last year’s plunge in stocks “is a sign of a major tradeable bottom,” Lee wrote. “This was true especially considering that PMIs >50.”
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