Plunging Profits Are No Reason to Dump Stocks, in Tom Lee’s View

(Bloomberg) -- Corporate profits are collapsing, but investors should stick with stocks.

Such is the latest advice from Tom Lee, the head of strategy at Fundstrat Global Advisors LLC, whose sometimes unorthodox views have a habit of grabbing headlines. Lee slashed his 2020 earnings estimate for S&P 500 companies to $50 a share from $110 while sticking to his year-end target of 3,450 for the index. The price forecast, the second highest among strategists tracked by Bloomberg, represents a 17% gain from current levels.

Profits will take a hit as stay-at-home orders during the coronavirus outbreak constrain demand and it takes time for companies to react by cutting costs. While the expected drop is worse than Lee previously forecast, he anticipates a massive recovery in 2021, driven by a boost from reopening the economy as well as monetary and fiscal stimulus. Companies in the S&P 500 will earn a record $193 a share next year, implying a multiple of 15 that’s “pretty good risk/reward,” he said.

“The middle months of 2020 are going to be bad and 2Q 2020 should be a loss,” Lee wrote in a note to clients. Still, “this does not mean stocks should go down.”

Lee’s earnings forecasts for both years are big outliers relative to the consensus. His 2020 projection is less than half of the $127.2 estimated by analysts that follow individual companies. His 2021 view, however, is more optimistic than the $160.9 consensus forecast.

As dramatic as Lee sees the trajectory of profit growth, his bullish view on the market stands out. Among 18 Wall Street strategists tracked by Bloomberg, he’s one of the three who projects the S&P 500 will end the year above its record high reached in February. The consensus calls for the S&P 500 to finish December at 2,933, a small decline from where it is now.

Tobias Levkovich, chief U.S. equity strategist at Citigroup, urges investors to stay cautious with so many risks looming in coming months, such as the upcoming U.S. elections.

“We suspect that chasing the market currently is a tad risky,” Levkovich wrote in a note to clients. “We would be more intrigued with buying at lower levels.”

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