Noted bull Tom Lee is calling for double-digit gains for the S&P 500 next year, but told CNBC investors are going to have to get used to an uncomfortable bull market.
“We’re getting into the realm of where investors really have to start embracing the ability of the market to rerate,” the founder and head of research at Fundstrat Global Advisors said in an interview with “Squawk on the Street.”
In other words, people only expect the market to go up on corporate earnings because the price-earnings ratio is at its long-term average.
However, Lee believes P/E expansion will continue because “as you move and mature in a bull market, P/E expansion is what takes root.”
“We are going to be surprised. It is going to be an uncomfortable bull market but people will need to get used to that.”
He has a year-end target of 2,325 for the S&P 500 next year.
That’s because Lee sees more positive forces than negative, including strong job growth and consumer spending.
While there has been a plethora of headwinds for the market, such as uncertainty about China and Europe, he thinks as that uncertainty diminishes people will see the benefit of the jobs growth.
“I think housing is going to really strengthen next year. We’ve got the benefit of lower oil, and I think companies with good balance sheets and better visibility will start to be a bit more aggressive,” Lee said.
“That’s going to allow investors to say ‘look the market, even though it’s at 16 times I think we can start to think about 16 times next year and then also boost the multiple.'”
As for where to put money to work, he thinks tech is a really attractive investment for the next three to five years.
The sector has been absorbing other industries, and its ability to redefine its revenue and produce earnings with very little capital “means the sector valuations should go up,” Lee noted.