The only bubble in the stock market is the 'bear bubble' of overly negative sentiment, Fundstrat's Tom Lee says

• There's a bubble in bearish investor sentiment, according to Fundstrat's Tom Lee.
• "I am struck how investors 'default' stance on equities is bearish for stock ideas and for the market overall," Lee said.
• Lee sees a bullish year-end rally and recommends investors continue to buy any declines.

The only bubble in the stock market is in the pervasive bearish sentiment among investors, according to a Monday note from Fundstrat's Tom Lee.

In his recent conversations with investors, he noticed a persistently bearish bias towards the stock market even in the face of an impressive year-to-date rally that is setting up well for a continued move higher into the end of the year.

"The primary driver of cautiousness is the overall sense of gloom around a few factors," Lee said, pointing to geopolitical risks, the rising federal debt pile, concerns of inflation staying above 3%, and the current state of the commercial real estate market.

The consistently bearish sentiment among investors has been showcased in recent sentiment surveys, including the AAII weekly survey and the CNN Fear and Greed index, which remains in "Fear" territory despite the S&P 500 being up 15% year to date.

"I have researched markets for over 30 years, and I am struck how investors' 'default' stance on equities is bearish for stock ideas and for the market overall," Lee said, later adding, "the bubble today remains 'the bear bubble' — the entrenched belief that equities need to fall 30% to 40% to properly reflect the doom out there." 

But bullish stock market investors have the persistent bears to thank for the recent rally in stocks, according to Lee, as he sees much of the S&P 500's 7% gain over the past two weeks driven by overly bearish positioning among institutional investors that had to be reversed via buying stocks.

And going forward, Lee continues to recommend that investors "buy the dip" in stocks.

"We are finding more reasons to be constructive into year-end than we were a few weeks ago. Namely, economic momentum has slowed in a way that has become supporting of softer inflation," he said.

Lee also highlighted that positive seasonality in the last two months of the year, combined with continued bearish sentiment and positioning among investors, should drive stocks higher into the end of 2023.

He has a year-end S&P 500 price target of 4,825, representing potential upside of 10% from current levels.