In a Monday note, the head of research said consensus on Wall Street appears to be “cautiously positioned” given seasonal trends and the mixed performance of several sectors last month.
Lee noted that the market turned defensive in April as healthcare outperformed, while technology also led the way higher for growth stocks. Meanwhile, sectors that were hit hardest by the pandemic – financials, consumer discretionary, industrials, basic materials, and energy – saw mixed performance.
But Lee sees a strong cyclical rally up ahead for a number of reasons. He predicts that daily US coronavirus cases will decline at an accelerating pace in May as the vaccine rollout continues. He also forecasts that the country will ease restrictions and is on track to fully reopen within the next six weeks, strengthening economic momentum.
Lee also noted a Goldman Sachs survey from last week showed that 60% of analysts said they expect demand in their industry to surpass pre-virus levels in 2021.
“So the key question is whether the pickup in economic activity is enough to ‘positively surprise’ the market, and thus, trigger additional gains in cyclical stocks…in our view, the answer is yes,” said Lee.
If those gains were already priced in, cyclicals would be trading about their 2019 highs and this hasn’t occurred yet, he added. For example, energy stocks are still 30% below 2019 levels, Lee said.
Other Wall Street analysts are equally bullish on a cyclical stock rebound.
Nomura’s Charlie McElligott is predicting a “crash up” in cyclical value shares over the next three months, while JPMorgan’s Marko Kolanovic sees a continued rally in commodities and a pickup in interest rates pushing cyclical stocks higher with a “move that will be bigger than we saw earlier this year,” Lee noted.
The Fundstrat strategist recommends investors stick with his “epicenter stocks,” and reiterated his view that energy stocks are the most undervalued sector.
“So for the month of May, we think the most non-consensus trade, hence, least crowded, is to be long Epicenter,” said Lee.
Fundstrat’s “Epicenter” stocks are stocks in cyclical sectors hit hardest by the pandemic.