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With the first few results of earnings season under our belts and stocks on track for their best two-week gain in two years, many investors might be inclined to look at the market's inability to break through to new highs as a sign of weakness, maybe even a failure.
J.P. Morgan's Chief Equity Strategist Tom Lee is not one of them.
While he concedes that Q3 earnings should be "good enough" or will likely be "a push," he thinks the rally is set to continue, for one very simple reason: risk-taking.
"Since Oct. 4 we have seen the biggest rally in high yield in two years," Lee says in the attached clip. "So I think we're getting a confirmation that investors are embracing risk again, which means the rally has a lot more legs to it."
While Lee's latest note to clients opens with an acknowledgement of the "broadbased improvement in risky assets," many would argue that there has to be more of a catalyst than that to break us through the iron curtain of trading ranges that has kept investors incarcerated since August.
Lee is undaunted and says earnings will "be pretty solid" relative to lowered expectations and the S&P 500 will still deliver double-digit earnings growth, which he calls "an impressive result." As for guidance, he doesn't expect to hear much from companies regarding next year's earnings.
He also feels that the rate of change in domestic economic data since September has been better - which is not to suggest things are good - including today's retail sales results.
But most of all, he thinks there's a "tailwind" going in to the fourth quarter due mainly to the lower price of oil.
"Brent crude is down $25 and that amounts to about a $3 tailwind to S&P earnings," he says.
As we prepare for the first real busy week on the earnings calendar, Lee says he will be paying special attention to tech and airlines, the former of which has been a "bright spot" while the latter has been hammered so badly that the bar is low enough to enable upside surprises.
