Tom LeeCindy Ord/Getty Images

  • With strong earnings reports from the FANG stocks on Thursday, coupled with the ongoing reopening of the US economy, earnings visibility is set to increase. That will help drive the stock market to new all-time highs later this year, according to Fundstrat’s Tom Lee.
  • In an interview on Friday with CNBC’s Scott Wapner, Lee said that many investors are ignoring an upcoming binary event that has a high probability of success: a breakthrough in the development of a treatment or vaccine for COVID-19.
  • Lee said investors should have exposure to sectors that were hardest hit by the COVID-19 pandemic, because “in a world where there’s a vaccine or cure, they’ve got defendable businesses.”
  • Visit Business Insider’s homepage for more stories.

Investors should prepare for new all-time highs in the stock market and have exposure to both the FANG stocks and the so-called “epicenter” stocks, or companies that were hardest hit by the COVID-19 pandemic.

That’s according to Fundstrat’s Tom Lee, who said in an interview that Thursday’s blockbuster earnings reports from Facebook, Amazon, Apple, and Google-parent Alphabet, coupled with the ongoing reopening of the US economy, set the stock market up well for the rest of the year.

“We’ve got the FANG, which is 20% of [S&P 500] market cap, we’ve got secular growth and tech posting good earnings, and now if the economy is going to safely reopen, there’s enough visibility for earnings growth to improve and that’s how we get to all-time highs,” Lee told CNBC’s Scott Wapner on Friday.

Lee highlighted that while large-cap tech stocks may look expensive, relative to bonds, they’re actually cheap.

Read more: These 16 global stocks have at least 20% upside in the next year — and they’ll continue to thrive as COVID-19 accelerates a crucial technological shift, UBS says

According to Lee, the 10-year US Treasury trades at a price-earnings multiple of 180x, while corporate bonds trade at a price-earnings multiple of 40x, “so FANG’s actually pretty cheap as a bond proxy,” Lee said.

Lee advised investors to continue holding exposure to FANG and other secular growth stocks, saying they make up 20% of S&P 500 earnings and market cap, “so they’re not expensive versus the market,” he said.

Lee also recommended investors buy stocks in discretionary sectors like casinos and theme parks. 

“I think if cases are plateauing and the economy re-open moves forward, 60% of earnings growth are going to come from four groups, the epicenter sectors. And these are under-owned and historically really are the trade you want to rotate into,” he said.

Read more: ‘The stock market can drop as much as 80%’: A 47-year market vet explains why we’re in the midst of a global bust — and makes a case for $10,000 gold

Lee said investors should be buying epicenter stocks because investors “have very little exposure” to them even as they make up 25% of the S&P 500.

Lee added that many investors are ignoring an upcoming binary event that has a high probability of success: a breakthrough in the development of a treatment or vaccine for COVID-19.

If that happens, expect consumers to become less fearful and feel more comfortable going out and spending, and investors to rotate out of growth and into the epicenter stocks.

Read more: A Wall Street quant chief breaks down why a COVID-19 vaccine is not the silver bullet investors have been hoping for — and warns another stock-market meltdown is likely

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