Fundstrat's Tom Lee: We're not falling into a recession, we are slipping into an expansion
TLDRTom Lee, the biggest bull on Wall Street with an S&P target of 4700, argues this is an inflation war, not a traditional Fed tightening cycle. He believes the Fed will stop tightening sooner than expected as inflation expectations have collapsed. With earnings bottoming out and the economy recovering, he sees a potential expansion and bull run to retest old highs. He recommends tech stocks like CISCO as the market broadens beyond FAANG names. While optimistic on further upside, he cautions investors that markets don't go straight up and some tactical pullbacks are likely.
Takeaways
- 😀 Tom Lee sees the stock market rallying as the Fed's inflation fight nears its end
- 📈 He believes stocks will pin themselves to previous highs as cyclicals lead
- 💡 Lee says the Fed will stop tightening once inflation expectations break, not the economy
- 📉 Consumer 1-year inflation expectations have collapsed to 3.3%
- 🔄 Rather than falling into recession, the economy may be entering an expansion
- 👍 Earnings are bottoming and CEOs see the economy bottoming out
- 📊 Tech remains a top sector pick, but the focus is on tech laggards and adjacent spaces
- 🔎 Cisco and Juniper offer growth potential at reasonable valuations
- 😎 Consumer discretionary should benefit from broadening market and fading inflation
- ⚠️ Tactical pullbacks are still possible despite momentum
Q & A
What is Tom Lee's role and why is he notable?
-Tom Lee is the Head of Research at Fundstrat and a CNBC contributor. He is considered the biggest bull on Wall Street with an S&P target of 4700.
What is Tom Lee's view on the current market rally?
-Tom Lee believes the market rally is being driven by a changing framework - that this is an inflation war, not a traditional business cycle. He thinks the Fed will stop tightening sooner than expected.
How does Tom Lee explain the shift to an economic expansion?
-Tom Lee cites improving Q2 earnings ex-energy being up year-over-year as evidence that earnings have bottomed. He also references comments from Morgan Stanley's CEO who feels the economy has bottomed and is on a trajectory for the Fed to cool off, leading to an early cycle expansion.
Why is Tom Lee bullish on tech stocks outside the major AI players?
-Tom Lee is bullish on tech stocks like Cisco and Juniper because he expects a broadening stock market recovery that includes adjacent plays to AI like networking equipment. These stocks also have relatively low valuations that could expand with sustained growth.
What is the basis for Tom Lee's bullish S&P target?
-Tom Lee's S&P target of 4700 is based on his expectation of a broadening stock market recovery, especially if small caps start to participate more. However, he acknowledges tactical pullbacks are still possible.
What evidence does Tom Lee cite for fading inflation expectations?
-Tom Lee cites the collapse in the 1-year inflation expectations survey to 3.3% as evidence that consumer inflation expectations are rapidly falling. This suggests the Fed's inflation fight is working.
What shift does Tom Lee expect compared to traditional Fed tightening cycles?
-Unlike typical cycles, Tom Lee doesn't expect Fed tightening to break the economy. He thinks the Fed will stop sooner, when inflation expectations break, allowing earnings and the economy to rebound.
What similarities does Tom Lee see to past inflation wars?
-Tom Lee notes that after past inflation wars ended, the stock market recovered to pre-bear market levels relatively quickly. He sees potential for that again, with cyclicals leading the way after surviving the inflation fight.
Why does Tom Lee expect FAANG stocks to continue leading?
-While acknowledging the potential for a broadening market, Tom Lee says FAANG remains his top sector pick given the growth potential if trailing names like Meta can sustain momentum. He sees adjacencies like equipment benefitting too.
What warnings does Tom Lee give about the potential market recovery?
-Despite his bullishness, Tom Lee warns that nothing goes straight up. He acknowledges potential for tactical market pullbacks still, perhaps caused by a spike in volatility.
Outlines
📈 Market outlook and Fed policy
Tom Lee discusses the market rally and outlook for rest of 2023. He says inflation expectations have collapsed which means the Fed may stop tightening sooner than expected. This could lead to an economic expansion rather than recession. Cyclical stocks have survived the inflation war and earnings have bottomed, supporting a bullish view.
Mindmap
Keywords
💡Layoffs
💡Efficiency
💡Fed Tightening Cycle
💡Inflation War
💡Market Rally
💡Earnings Bottomed
💡Expansion
💡FAANG
💡Cyclicals
💡Valuation
Highlights
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Transcripts
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