Bearish Sentiment Into Earnings Means Buy Stocks, Tom Lee Says

(Bloomberg) -- Investor sentiment has worsened just before what’s forecast to be the best earnings season in seven years. That’s a buy signal for one of Wall Street’s biggest bulls.

The souring mood is a sign that solid fundamentals are being overlooked, according to Tom Lee, the co-founder of Fundstrat Global Advisors LLC.

A weekly survey from the American Association of Individual Investors showed the proportion of respondents who say they’re pessimistic on the stock market exceeded those with an optimistic view by the biggest margin since February 2016. Meanwhile, banks just kicked off an earnings season where analysts expect S&P 500 companies to report a 17 percent jump in profit, the fastest since 2011.

Such a contrast has historically boded well for future market returns, according to Fundstrat, whose study showed stocks have tended to be higher one month later when sentiment was bearish ahead of earnings.

“We are looking for positive overall earnings results, which, combined with
weak sentiment (contrarian signal), should act as a positive catalyst in the month,” Lee wrote in a note. “The weaker the sentiment reading, the stronger the S&P 500 performs into earnings season.”

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