Renowned strategist Tom Lee explains why he sees new stock-market records by year-end despite a massive hit to corporate earnings

• Expect a massive hit to corporate earnings this year, accompanied by new all time highs in the stock market, Fundstrat's Tom Lee said.
• Lee said he thinks that despite the likelihood that companies will report negative earnings in the second quarter, the S&P 500 can trade to 3,450 by year-end, driven by stimulus policies and a sharp rebound in corporate earnings.
• "The middle months of 2020 are going to be bad and 2Q2020 should be a loss ... but this does not mean stocks should go down," Lee said.
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Fundstrat's Tom Lee thinks corporate earnings will be negative in the second quarter as companies grapple with the coronavirus pandemic, yet stocks will be trading at record highs by year-end.

In a note published Tuesday, Lee slashed his earnings forecast for 2020. Lee now expects S&P 500 earnings per share to come in at $50 for the year, down from his previous estimate of $110.

Lee then expects a sharp rebound in corporate earnings, with the S&P 500 generating a record high $193 in earnings per share in 2021.

The sharp rebound will be driven by more efficient and leaner companies that improved their operating leverage amid the coronavirus pandemic, a re-opening of the economy, fiscal stimulus, and low interest rates, which will reduce the cost of capital for companies that are looking to raise debt.

Cash on the sidelines and a potentially expedited coronavirus vaccine are two reasons why the S&P 500 is a fairly good risk-reward right now, Lee said.

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Lee observed that in the short term, the S&P 500 index has closed above two important resistance levels: 2,793, or the 50% Fibonacci retracement level, and 2,934, or the 61.8% Fibonacci retracement level.

Monday's close above 2,934 represents a potential upside breakout that could set the stage for the market to rally to 3,100 and above.

Lee has a year-end price target of 3,450 for the S&P 500.

"In other words, the probabilities of a new low are diminishing. And given the record cash on sidelines ($4.8 trillion, or 16% of market cap), we see favorable risk/reward," Lee said.

In an interview on CNBC's Halftime Report on Wednesday, when asked how the S&P 500 can go higher when he expects negative earnings in the second uqarter, Lee replied, "The S&P 500 is not the economy."

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