A top strategist says investors should stay in stocks hit hardest by the pandemic despite recent painful downturn

• Tom Lee of Fundstrat Global Advisors told CNBC on Wednesday that investors should stay in "epicenter stocks" that have been hit hardest by the pandemic despite the recent market downturn.
• "It's a very tough spot, and we've been sticking with these things and it's been really painful, but I still think that's the right way to tilt," said Lee.
• The strategist says that once the US sees stimulus and gets past "this huge bump around Election Day," the earnings outlook for 2021 will look "really strong for these cyclical stocks."

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Tom Lee, Fundstrat Global Advisors head of research, told CNBC that investors should stay in cyclical stocks despite the recent market downturn.

As the S&P 500 slipped 3% on Wednesday, the strategist doubled down on his view that stocks hit hardest by the pandemic, what he calls "epicenter stocks," will rebound once the US economy reopens. This summer, he said sectors like travel, leisure, and hospitality are all part of the epicenter of the pandemic crash.

"It's a very tough spot, and we've been sticking with these things and it's been really painful, but I still think that's the right way to tilt," said Lee.

Lee said one reason he's comfortable sticking with epicenter stocks is that the recent surges of COVID-19 cases in the US are mostly in parts of the country that didn't experience the outbreak previously. States like New York have so far seen only a "benign" rise in infection and are unlikely to lock down like countries in Europe, he added.

The strategist also said industries have high operating leverage that should continue to grow after the presidential election, and this will be bullish for stocks. Twenty-six industries have recorded flat or negative revenue growth in the third quarter but reported positive Ebitda, said Lee.

"So in a restricted top-line environment, they've been posting growth in EBITDA, which means once we get past this huge bump around Election Day and we get stimulus, the 2021 earnings outlook is going to look really strong for these cyclical stocks," Lee said.

A risk to epicenter stocks will be significant business restrictions in the US, said Lee. But he added that closures of restaurants, for example, would unlikely lead to a broader stock selloff, as restaurant spending doesn't make up a large portion of US gross domestic product.

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"The real thing driving this economic momentum is people buying homes. People being able to safely go to school, which has been true. People able to keep businesses open, which has been true," Lee said. "But there are certain activities that are not safe ... and those are the ones that are going to get hit. But for 40% or 50% of the S&P to take this hit, to me that's an overreaction."

In a Thursday note, the strategist noted that the VIX, or CBOE Volatility Index, surged to above 40 this week in another potential bullish sign for stocks.

"When VIX reaches 40, we are near turning points for both VIX to fall and thus, stocks to find some footing. So, while this has been an absolute bludgeoning, we think this is a buying opportunity and not a time to sell," he said.