Why Tom Lee Thinks We Could See S&P 15,000 by 2030

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1:54Hello and welcome to another episode of the Odd Lots podcast. I'm Traci Alloway. And I'm Joe Weisenthal. Joe, every once in a while, I think it's a good idea to pause and consider everything that's happened in the market and how it actually matched up to initial expectations. because I think, you know, we're recording this on, let's see, June 18th. S &P 500 is at another record. Meanwhile, 10-year treasury yields are at what, like 4.3 % now? And I think certainly two years ago, maybe even a year ago, I don't think anyone would have thought that stocks would rally this much in a rising rate environment.

2:34No. I mean, I think this has been, the beginning, the middle of 2020, I'm starting to lose track of the years, parts of 2022, obviously, the stock market was total dead money. And going into 2023, I think there was a lot of pessimism recession. And that would have been like, well, yes, this is what we expect when we get a rising rate environment. Stocks go down, the economy slows, maybe a recession happens. And then the market turned around, the economy continued to boom, But it's not like they cut rates or anything. And in fact, the main story has been that rate cuts keep getting pushed further into the future.

3:09Rate cut expectations. Yeah, absolutely. But despite the record in the S &P 500 and all these, you know, we keep talking on the podcast about all the lines going up into the right. Yeah. And there are a lot of them at the moment. There's some nervousness in the market right now. I think that's fair to say. So you see a lot of people, for instance, talking about the lack of breadth in stocks. Yeah. Look, if you're an S &P 500 index fund holder, then there's a lot of conversations you just turn out. Someone's like, oh, there's lack of breadth. It's like, yeah, whatever, man. My ETF is up 15 % through the year.

3:45I'm happy with that. You know, like that's pretty great no matter what. But if you're an active manager, you want to beat the index. if you're worried about like durability, you might notice the fact that like, you know, if you strip out a few really big tech stocks like NVIDIA and a few others, returns are much worse. And so that raises all kinds of anxiety. Is this entire thing just sort of hanging on endless demand for chips to run AI models? Absolutely. So today I am pleased to say we do indeed have the perfect guest. You know, know, I said in the intro that almost no one would have expected stocks to be where they are.

4:23This person did expect stocks to be where they are currently. This person is one of the few that I can think of that has basically called a lot of the market right over the past year or two. So probably someone we should talk to. Yes, absolutely. So we are going to be speaking with Tom Lee. He is, of course, the co-founder and head of research at Fundstrat Global Advisors and FS Insight. Tom, welcome to the show. Thank you very much. So I know you're sometimes described as an Uber bull. Is that a fair characterization of how you feel about markets? I think that label is not reflective of how I feel about markets.

5:03I think that label is generally used by perma bears who've been perma wrong, and it's a cheap shot taken. Okay, but I get that it sounds like a cheap shot, But on the other hand, Uber bowls or perma bowls historically have like 100 years of lines going up to the right on their side. So my view when I hear someone being described as a perma bowl is, oh, this is someone who except for like five minutes here and there in 2020 and 2009 is perma correct. Yeah, I'd say so. I think people don't live in those longer time frames. In the day-to-day, people live as if this is a street battle, and the label Uberable is like someone, well, you know what?

5:50He might lead us out, but I don't trust him because we're in a street fight. And so it's generally, I find people saying it more as a cheap shot. No, the people who say it are all really obnoxious. That I agree. I didn't mean to be obnoxious. Wait, did you just call me obnoxious? No, when you said it, you were characterizing other people. Yes. Well, I feel like we should give people the - I take no offense. Okay, excellent. I feel like we should give people the opportunity to describe their own work. But why don't we talk about something concrete, which is at the beginning of this month, Tom, you at Fundstrat put on an S &P 500 target of 5 ,500.

6:22We're at about 5 ,475 or something like that right now. So just in that short time frame, you called it correctly. What did you see? this is actually a textbook rally at the start of this month we alerted our clients that since 1927 when you look at the start of june but markets were up in the first quarter but then had a drawdown in april which is what we had yeah that happened 11 times 11 of 11 times June was a positive month. So May is essentially a recovery month. And then June is the month where markets go back to risk on. The median gain since 1927 is 3.9%, which calculated to 5 ,500. There you go.

7:15Simple math. Investing made easy. But zooming out, you're at Fundstrat for years. Prior to that, you were at J.P. Morgan. I was a big fan of your work then. correctly calling for much higher stock prices through much of the 2010s when, you know, there were still a lot of people calling for double dips and the sort of rise of a pretty large bearish contingent. How do you work? What do you do? Because there are all different approaches that people have towards, you know, making educated guesses as to where the stock market could go. How would you describe your approach? Well, fundamental to our process is evidence-based research.

7:52So, you know, at the core, we really try to frame where history could explain where we are today. We rely on a lot of cross-market signal. So to us, the bond market is always smarter than the stock market. That's why they say equities are the land to see students. And the third is, of course, monetary policy is really the driver. So you can't fight the Fed. And then I think the fourth is that thematic approaches surpass cyclical. What does that mean? Well, part of our work relies on what we call like thematic drivers. One is millennials. So that's since 2018, we've talked about how millennials, which is the largest generation are reshaping the economy, which they are mainly through fintech and changes in preference but of course now coming is a big generational wealth transfer of you know as much as 80 trillion dollars the second of course is that there is a huge global labor shortage which has started in 2015 and won't be resolved till 2035 and the two previous instances of global labor shortage resulted in a parabolic move in technology stocks which has been part of our thematic approach.

9:09And now we see two other things like energy security and cybersecurity are huge thematic drivers, especially because of AI. And so this grounds our work. We not only use it to judge markets, but we use it to build our Granny Shots core stock portfolio, which is a thematic portfolio picks the strongest stocks within each theme. And that has outperformed every year since 2019. I'm trying to think how to phrase this question, but what are the strong themes mean for the overall market? Because I think everyone would agree that stuff like AI is interesting and promising, maybe a little overhyped at this point, but you could make the argument that there is potential there.

9:52And yet, you know, we've seen the S &P 500 as a whole go up and there is that argument over breadth, like how much of this is purely AI and the stuff that people are getting excited about versus general optimism about the market? Well, I mean, if I look at the stock market, I think it is playing out with all the things you just mentioned because the groups that are affected by high and tight monetary policy have really lagged, whether it's the regional banks or industrial multiples are being suppressed. And we know that the spend and actually now some of the synergy coming from AI is driving not only the producers of AI like NVIDIA and some of the software companies, but in many of the companies that are leveraging this for revenue growth.

10:41So I think it is playing out. But overall, I think it's on balance a healthy economy because companies are generating good earnings growth and the labor market has come back into balance and consumers aren't highly levered, which is really the big deal because to me when consumers can't borrow more money because they borrow too much that's really when the economy hits the tipping point when it comes to consumer balance sheets just on this what do you look at when you say okay the consumer is in not high levered i always see discussions like oh excess savings gone people look at total credit card debt yeah what do you look at well i think the gold standard is still the debt service ratio which the federal Reserve puts a lot of time into and employs a lot of economists to build a fair view and the debt service ratio today is still under 10%, which, you know, for instance, before this decade, you'd be in a sort of peak consumer borrowing at the 14 to 16 % level.

11:42So consumers can, if interest rates don't move, they can borrow 40 % more money. I think the cash, Excess savings is a spurious argument because I don't remember it in my 30 years, people saying consumer cycles turn when their excess savings is gone. I mean, that's not really been how the business cycle works. You mentioned 30-year career just then, and I realized I'm kind of unfamiliar with you other than at Fundstrat. Can you maybe give us a recap of what you've been doing for three decades? Yes, I've essentially had the same job for my entire post-college career. I started off at Kidder Peabody in the early 90s.

12:21One of my old bosses was at Kidder Peabody. David Dwyer? No, no, someone else. Anyway, sorry, keep going. Yeah, I got into stock research at that time, and I was working at the sector I was assigned to was wireless. So the first 14 years of my career arc was as a technology analyst covering the wireless industry, which, again, for my clients, many of which I still have from those days, no I'm not an uber bull because there were many times I had sell ratings on stocks but it's not fun to be telling people to short a stock that they own that's when they they're very angry and then in the 2000s wireless was consolidating and I wanted to find some other things to do so I started to do some work on bankruptcy bankrupt stocks because many wireless stocks went bankrupt I did a whole piece called the chapter after chapter 11 where I looked at over 2 ,000 publicly listed bankruptcies.

13:19I used our Mumbai team, or at the time we called it Mumbai team, at J.P. Morgan. And we went through all these filings and we found that stocks that emerge from bankruptcy do well. So we had a whole strategy around buying bankruptcy stocks. And then J.P. Morgan asked me at the time if I wanted to become the small cap strategist on top of wireless. So I had two jobs. I ranked in both categories. And then in 07, they asked me if I wanted to become the chief equity strategist, which I've been doing ever since. And started Fundstrat 2014. So this is our 10th year. Congratulations. Okay. So given your history with the wireless companies and technology overall, I feel like I have to ask you about AI and NVIDIA and all of that.

14:04Is there any common thread or any valid comparison between the AI boom that's happening right now and, say, the internet bubble of the late 1990s and early 2000s? There are a lot of parallels. When I started doing wireless, there were 34 million cell phones. Today, there's 7 billion. So it's a hyper growth industry that grew almost in parallel with internet because without mobile, you wouldn't really have the internet that we have today. In the early stages of that growth, so when you look at penetration, Wall Street always underestimates the importance of the technology. And part of it has to do with it's a generational lens.

14:49every new technology is adopted by a young cohort people in their 20s teens or even 30s but most people on wall street are in their 40s or 50s so they're one generation removed i remembered when our pc analyst at kidder said why would you have one computer per household or even more than that because they're 2500 and i know when cell phones first emerged people thought it was a yuppie toy and it was going to be only for people to make$75 ,000 a year. But what I learned as a wireless analyst was teenagers and young kids, especially in Europe, were using cell phones. So I used a vintage model saying that if 100 % of teenagers have a cell phone, by the time they're 60, the penetration rate should be whatever it is.

15:33That's like AI. The adoption rate for AI is staggering, but the use case is important because there's a labor shortage. so to me i i think it's very likely we're underestimating how much revenue all these companies will make i can give you some simple math yeah please the global labor shortage by the end of this just by the end of this decade is close to 40 million worker equivalents and that's three trillion of wages okay we're turning labor cost into silicon or into tech automation of which we know today 80 % is hardware or silicon. So does that mean whoever is supplying the chips might have a$2 trillion revenue?

16:18Probably. And right now, the largest share of that would go to a company like NVIDIA. So if NVIDIA is$100 billion in revenues now, by the end of this decade, is it an$800 billion of a trillion dollar revenue company? And then what should we discount that rate? I'd say there's probably a lot of upside.

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17:32Support for the show comes from public.com. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic option plays on the side. The point is you're engaged with your investments and public gets that. That's why they built an investing platform for those who take it seriously. On public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry leading 3.6 % APY, high yield cash account. Switch to the platform built for those who take investing seriously.

18:05Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. So that's sort of the argument from the fundamentals perspective. The other thing people like to do is they like to draw these dual X axis lines where they're like, here's the chart of NVIDIA starting at some arbitrary date.

18:47Here's the start of Cisco starting at some arbitrary date. And they line up the peak so that the peak always happens to be right now. But regardless of the fact that that's largely what knaves and scammers do, it is true that just from an overall index perspective, there is an incredible lot riding on a handful of companies right now, whether it's NVIDIA specifically, the Mag7 more broadly. And that in 1999, there was just an incredible weight on Cisco and Sun Microsystems and Microsoft and a couple of others. do you see any parallels in the market environment yes there's a lot of parallels but there are some differences you know keep mine cisco sold a you know hundred dollar box nvidia is selling a fifty thousand dollar chip so okay the moat around that is much much greater i also think to contextualize this we need to look at the global economy yeah if we're turning labor cost into silicon than which countries are really the primary suppliers of technology.

19:54The U.S., by a country mile, is the only supplier. So the U.S. is essentially exporting technology now. And that's different because Internet was more democratized. People just put up towers and lead fiber. You can't create your own version of an NVIDIA chip. You have to buy it from NVIDIA. So I think that tech will probably be 40, 50 % of the global stock market weight. Where are we now? That's probably 20. Oh, wow. It's probably like 18. I mean, in the US, it's only 40. And in the US, it's 40. Globally, it's 18. And you say it's going to go to 40 to 50 % globally. Yes, because you're replacing recurring labor costs with a capital investment.

20:39Oh, interesting. So you mentioned the net present value of tech stocks just then. And I'm curious, talk to us about rates, the higher interest rate environment and what it means for stock valuation, because I think this is where people are either a little bit surprised or perhaps a little bit nervous. The idea that even in the higher rate environment, stocks can move upwards. Yeah, well, again, I can cite some history and then maybe provide some context. But since 1935, when you look at the relationship between the 10-year yield and forward P.E., it is not linear. It is a dynamic relationship.

21:22And between 4 % and 7%, it is positively correlated. So when interest rates go up, P.E. rises. logically it sort of makes sense because you're seeing it now when you have higher rates it's barriers to entry so the existing companies make more money and companies earn money on their cash so do unlevered companies are actually you know for apple it's like six seven eight dollars in earnings right some big number actually with splits it's lower and between four and five percent the median ford pe has been 18 and a half and 48 of the time it's actually above 20 So what is it? What's S &P trading at now?

22:04Well, the P.E.? The Ford P.E. is probably around 18. OK. But the median Ford P.E. is 16. What should we make of the fact that a lot of the market is not doing well? So, again, you know, for those of us who are just like the boring, put it in an index fund investors, amazing year. But there are big chunks of the market that that was only up 2%, I know, or something like that. What should we read? Does it say anything that so much of the market is doing pretty, I guess, mediocre this year? I think it speaks to a lot of things. One is the market is starved for cash. There's$6 trillion cash on the sidelines.

22:42FINRA margin debt is like 20 % below where it was in October 2021. So there isn't a lot of money sloshing in the stock market. I know it's weird because we're at record highs. Yeah. So if there is money actively trading, it's just buying the high volume sectors, which is tech. From a rates perspective, and I kind of mentioned it before, the groups that are hurt by tight policy have really been sucking wind. So I think if monetary policy eases or people are more convinced of it, then breadth expansion is going to be pretty fierce later this year. What is your outlook for rates at this point? Because you mentioned the strong consumer earlier, but on the other hand, we have seen a little bit of weakening in the labor market.

23:27We have seen CPI start to soften, although there's a lot of debate over whether or not that's going to be a durable trend. But what are you seeing? well i think inflation if we looked at historically how people looked at inflation whether it's the surveys or isms inflation's under control because like for instance the ism services manufacturing the price is paid component is below the long-term average right now so at 57 people think 57 means price going up that's not true it's averaged like 58 since inception so actually price trends are below where they have been i think people aren't using history to understand where we are now and if you look at umich surveys both one year and five year inflation expectations are below the long-term average so consumers and businesses in their perception don't think there's inflation CPI is elevated, but as you guys know and talked about and many economists point out, it's really due to two components that are kind of lagging, right?

24:34One's shelter and one is auto insurance. And, you know, the median CPI inflation rate right now is 1.4 % year-over-year. It's long-term average is 1.6. Everything except for housing and auto insurance is below trend. Median is when you just look at what each component is doing, and some are higher and some are lower, but the median category is 1.4%. Yeah, there's 137 components. Another way to look at it is what percentage of the basket of CPI equal weight is below their long-term year-over-year growth rate. So take each component and just say, where does it sit? It's now at 55%. And the long-term average is 50.

25:16So more than 55 % of sleep-back components are below their long-term average. It's considered controlled when it's 50%. We're at$54.73. Tracy mentioned your June target. Do you have a year-end target for the market or a one-year target or anything like that right now? We do. Where can we go? Well, on the first week of December 2023, we had said our target for 2024 was$5 ,200. which at the time was almost 20 % upside. Now our 5200 is low because we're above that level. We haven't changed our target because our practice is typically to do it at the mid-year. Okay. So we're two weeks away. Can you give us a little hint?

26:03Yeah, I'd say originally we said earnings could be 270. Okay. And we'd put like an 18 multiple on that. and that's got you to 5 ,200. 2025 earnings no longer look like 270. It looks more like 285. And as I was citing, as interest rates moved up, the PE should be higher. So let's say 20 is a more appropriate PE multiple or even 21. Then you get into the 5 ,800-ish level. But I think the open question is really if you're in mid-June and December 31, is it a line up or is there a pullback and then a line up? And I would probably, this is not evidence-based, just an opinion. I don't see why it would be straight up.

26:59Here's something I always wanted to ask an equity strategist, but when you're coming up with the price targets, do the specific numbers actually matter for your clients or are they mostly interested in the direction, the overall direction, like line go up, line go down. Well, it's, it's a, do you know, this is a lifelong debate because for 30 years, I covered wireless stocks and had price targets. And our salespeople would always say, no one cares about your price target. But then the first thing in the meeting people, what do you think, where do you think this thing goes? So they always care about the price target.

27:34I don't really value people's price targets which is 10 % above where you are now because to me that's just like that's like staying in the middle of the lane and you can't make clients money so whenever we did stock research we always had to build a base case on what we think could happen and then discount it at what we think is a reasonable rate a lot of our price targets seemed really crazy when we did wireless I remember I upgraded you can timestamp it I can show you Alamosa Holdings at 21 cents and it went to$22 my price target was not 30 cents it was$12 at the time and we upgraded Western Wireless at$1.74 our price target was$25 and it ended up going to$40 so I think we try to look at a normalized situation and in a normalized world if this is a normal S &P cycle okay following demographics i i could provide a chart later s &p should be potentially 15 000 by the end of the decade so yeah so to me that's the more as you move into longer time frames that's probably where i think we're moving towards can we title this episode tom lee why s &p could go to 15 000 by 2030 is that sure okay we we have we have many charts to explain that number oh you You should send them to us and we'll include them.

28:59Yeah, that would be great.

29:26Point is, you're engaged with your investments, and Public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry-leading 3.6 % APY, high-yield cash account. Switch to the platform built for those who take investing seriously. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal.