A top market strategist is issuing a contrarian call, saying rising oil prices may actually boost the US stock market.
In a new CNBC interview, Fundstrat head of research Tom Lee says the stock market’s recent reaction to higher energy prices suggests investors are handling the shock better than many expected.
“If I look back at the last two days, oil’s $15 higher than it was last week, but the S&P is higher. So to me, the market actually is handling higher oil prices better.”
Lee explains the underlying dynamics fueling capital flows into US equities amid oil price spikes.
“One, the US is an exporter of oil, so we net benefit as an economy from higher oil prices. The second is that other countries are importers. So the US not only looks better, but on a relative growth basis, it should outperform, which means flows back into the US.
And the third is, as we worry about global growth… when growth is scarce, people buy growth stocks. The US stock market is a growth index, so it’s coming out of the rest of the world back into the US. So I think it’s a rotation story.”
Lee also believes that the long-pressured software sector may already have priced in much of its downside risk.
“Well, I think software has bottomed because we tend to price in the negative risks early. The IGV, which is the software ETF index, has lost five multiple points. Now the forward P/E is 16 times.”
Lee says those valuations now make the sector look more like a cyclical industry than a high-growth tech segment, giving stock pickers a golden opportunity to accumulate solid software names at a discount.
“And I think out of that universe of 110 stocks, many actually have durable businesses. So I think you’re getting paid to buy it here at 16 times.”
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