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.

Read more: We surveyed 10 money managers about how they're handling the pandemic. They each shared their favorite hidden gems in the market, surprising trades they're making, and the big bets they can't live without.

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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