Stocks could hit record highs this summer on cautious investor positioning and better-than-expected COVID-19 data, Fundstrat's Tom Lee says

That, combined with cautious investor positioning toward equities, means the stock market is in "risk-on" mode and could hit record highs this summer, Lee said.
With mutual funds holding elevated levels of cash, and hedge funds turning bearish in June, investors should remain overweight stocks, Lee concluded.
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A resilient stock market amid a surge in COVID-19 cases and cautious investor positioning toward stocks suggests the S&P 500 index could hit record highs this summer, according to a note published by Tom Lee's Fundstrat on Monday.

Lee said markets have been "bracing for a more dire path regarding COVID-19," which despite the rising infections has yet to see a sustained increase in hospitalizations and fatalities.

According to Fundstrat, US gross hospitalizations due to COVID-19 are down 84% since the peak in early April, while US daily COVID-19 fatalities are down 83% since the peak in early May.

Additionally, Lee is encouraged by the actions being taken by officials in states where COVID-19 cases are surging, noting that states like Arizona, California, Texas, and Florida have implemented policies since the week of June 22 that include ordering bars and gyms to be shut. Texas has also issued a state-wide mask order.

While COVID-19 data is not coming in as bad as the market may have feared, investor positioning toward equities still remains cautious.

According to the note, macro and long-short funds turned cautious in June, while cash levels in mutual funds remain elevated. Hybrid-balanced funds, Lee said, "carry more cash [as a percent of assets] than any time in 12 years!"

The bottom line, according to Lee, is that the combination of the S&P 500 being resilient and sitting just below its all-time highs, in addition to cautious investor positioning toward stocks, means that investors should stay overweight stocks.

And while the upcoming earnings season will likely be lousy, much of that has been well telegraphed, and there will likely be little to no guidance.

Finally, for the next six months, investors should keep their eyes on these five upside drivers that could impact stocks, according to Lee.