When the stock market was in free fall back in March, Fundstrat Global Advisors founder Tom Lee made the bold call of a 25% rally by April.

He was right.

After that, he predicted a 50% recovery of the losses caused by the coronavirus pandemic would signal an “all-clear” that would accelerate gains to push the S&P 500 back near all-time highs. So far, he’s been right again and Friday’s surprisingly strong job report that showed U.S. payrolls unexpectedly added 2.5 million jobs in May has only fueled his bull thesis.

Now, Lee is doubling down on his call to continue leaning in on so-called “epicenter” companies, or stocks in consumer discretionary, industrials, and energy sectors that have been most beaten down to deliver the market to new highs.

“The market has moved with such vigor, but the economic data, maybe with the exception of today, has just been muddling and I think maybe today will be a call to action to get some money off the sidelines,” Lee told Yahoo Finance’s YFi PM, adding that he estimates the $5 trillion in money market dry powder will boost stocks further.

So far, his bet that this recovery would play out similar to the Great Recession in 2008 has proved true, with the hardest hit sectors recently showing the sharpest snap back. Casino stocks like Wynn Resorts, which rallied 20% this week alone, and energy names like Chevron, which rallied 10%, have well outpaced the overall market since the March bottom. Lee expects that trend to continue, if the market’s recent turn higher does indeed attract new money from the sidelines.

“I think that’s where the dry powder is going to go,” he said. “It’s going to seek cyclically sensitive stocks.”

Still a lot of risk

Lee conceded that certain epicenter stocks have seen recent rallies that could be indicative of speculative bets, including American Airlines which rallied 66% in the last two days after the company announced it would be flying more of its domestic schedule in July than in May (though still just half of its last year total.) As Bloomberg reported this week, the airline ETF JETS recently recorded 64 straight days of inflows, bringing assets from $33 million in March to more than $1 billion as its CEO credited the funding surge to “bored millennial day traders.”

“Airlines have definitely moved a little faster so things like General Dynamics and Snap-On might be better derivative plays,” he said, highlighting two alternative aerospace alternatives. Lee’s list also included cruise liner Carnival, which has rallied 50% off its March lows, but still trades at half its pre-COVID-19 level.

“Even though it’s bounced, it is still many floors below ground level,” he said.

Of course, there are still large downside risks to consider for any of the discretionary names that have so far benefited from lockdown orders being lifted. However, as Lee notes, since states have reopened coronavirus case counts have not spiked as many feared. Whether case counts rise in the wake of protests around the country could have a major impact on whether the consumer discretionary names can continue their run through the end of the year.

“The market is not oblivious to this,” he said. “The epicenter stocks would be cratering if there was incremental risk and you know county-by-county we are tracking it, so I think the fact that they are holding up is actually ironically telling us there isn’t a second wave.”

With the S&P 500 reaching nearly 3,200 Friday, it now sits just 200 points away from new all-time highs. As Lee notes, his epicenter stocks only account for about a quarter of the S&P 500 market cap, but could total 62% of the points gained if the index hits his price target.

Zack Guzman is the host of YFi PM as well as a senior writer and on-air reporter covering entrepreneurship, cannabis, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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