Tom Lee's Case for S&P 8,000 Has One Big Catch

26:38Tom Lee:make the AI story actually work. And if it doesn't, it seems to me that the S &P, which has risen nearly 9 % this year, most of that growth is coming from a handful of companies, not the big tech companies, but the semis and the dram companies, the memory companies, all of the sort of chips and shovel stocks that are fueling this AI boom. If that story doesn't work out, if things don't work out the way that we'd hoped, it seems as though you're going to see a very, very significant and violent shift to the downside. But it hasn't happened yet. And the story continues to roll on. I just, I assume that's on your radar.

27:18I think one thing, though, we should keep in mind is that it is, we're sort of maybe speaking in a narrative sense, because, you know, even as important as OpenAI is and Anthropic. If they were to, let's say, stumble here, I think S &P earnings wouldn't fall that much short of the 400, you know? But we also have to keep in mind that there's actually one person that in every point in history since the 1940s is like the most important person's hand on the market, which is the Fed. Like the Federal Reserve chairman is a single person. Like that's big key man risk. And you know, it's been amazing because we've never really had a Fed chairman suddenly like be incapacitated from their job.

28:12You know, I mean, I think that's a miracle of capitalism because like, you know, Kevin Warsh today is actually arguably one of the most important people in the world now. I'd agree with you. There's fragility. I mean, the market is, you know, S &P here at 7 ,300. You know, I just remembered in 2009, the market bottomed in the 600s. So, you know, I mean, it's definitely come a long way. But fortunately, the multiple is lower today than it was in 2009. But you're right. It's, you know, what's very different is the U.S. economy suddenly is growing faster for everything you've described, which is because of AI.

28:57And that's really, you know, the reason we can be both comforted because it's really happening mostly in a few countries. But then we can be very worried because you're right. It's creating path dependency on, you know, on a handful of people.

29:14Tom Lee:Yeah, it's almost like the question becomes, what do you want to do about that fragility? Do you decide because it's fragile, oh, I'm out? Or do you recognize at the same time, yeah, there is home run opportunity, as you mentioned. And do I want to miss out on that? It's kind of the big question. I'll pass it over to Scott, and then we'll get into some of your predictions for the second half of the year. So, Tom, you've said that AI is creating a productivity boom, and we have seen an uptick in productivity and not just a technology boom. What industries do you think benefit most from that increase in productivity?

29:48It's one of the things that is fairly hard to measure explicitly because I think that what AI has proven is a couple of things. You know, one, and I'm being anecdotal, but one is, of course, it makes people a lot more people who are highly capable, very productive, because I've seen that at Fundstrat Capital and Fundstrat where we are deploying essentially an army of researchers, but it's really just our clawed agents. And, but it's also revealing the nature of work because most people say, hey, this is a 40 hour a week job. And from an economic, when we measure it economically, we say, oh, you work 36 hours or, you know, we have like, because they punched a clock or, you know, a 40 hour week.

30:44But we know that most people in that 40 hours probably only work X percent of the time. You know, what is the actual time people are productive? Is it six out of the 40 hours a week? You know, it's possible. And most of the time people are just searching and eating lunch and, you know, doing other things. So what AI has done is it's helped fill in all that blank space and created work. And so I guess that's productivity. I believe a lot of white-collar jobs and even healthcare industries and financial services and tech really meet all that criteria, that AI is making all of those people highly productive, and they might still, in theory, only be working the same X percent of the 40 hours, but now a lot more is being accomplished.

31:39in a couple of years we know that it shouldn't be too long before we could say hey robots are going to be highly skilled with a lot of dexterity and people think it's only going to be warehouses and factories and i think that's true but i think in a couple years like residential construction will be transformed like i think homes will be built by artists and robots like We could build a Louvre as your house carved out of stone, and it's like the same price as your house. And we could recreate all of this wonderful architecture that Europe had built that you can't build in America today but with robots.

32:21So I think there's going to be that kind of productivity when robots gain a lot of capabilities. I just want to double click on that because every year we try and, and it's dangerous, pick one of the big tech companies that outperform. And the one that I'm most interested in this year is Amazon for the reason you just highlighted. And that is, our thesis is that where AI actually does create the shareholder value creation lives up to the hype is in one, autonomous, specifically Waymo, but two, industrialized robots. and Amazon has a million industrialized robots and the rest of the nation has 400 ,000 combined.

32:59Do you think Amazon will benefit from that great sort of robotics age that you're envisioning? 100%, Scott. I mean, Amazon, you probably know the company way more than me, but they're a logistics company, right? They are warehouses everywhere. They have merchants. why won't Amazon be part of like future home construction? Because, you know, just like Sears Roebuck, they could probably deliver homes and then their robots could be the carpenters and agents putting it all together. All of a sudden their TAM is, you know, doubled because it's the entire residential and office market. You know, I mean, I think as a logistics company, that means anything that requires logistics is really their addressable market.

33:51So yeah, I think that makes a lot of sense.

33:53Tom Lee:Just going to some of your predictions for the second half of this year. So at the beginning of the year, you set a price target. When you came on the show at the beginning of the year, the price target for the S &P was$7 ,700. We are tracking to hit that. but you change that in your half-time report, half-year report, you now see the S &P hitting 8 ,000 by the end of the year. But with this caveat, which I find interesting, that you think that the S &P in the fall, that the markets are going to hit something that resembles a bear market and then come ripping back up. If you could just lay out why you think that's all going to happen.

34:36Yeah, we did raise our target to$8 ,000, which is basically$400 in 2027 earnings. And then we trade it 20 times that multiple. That would be$8 ,000. But June to December, I think a lot of tests the market has to pass are going to be coming. The first most obvious is we have a new Fed chair. And Kevin Warsh has some ambitious goals. He wants to essentially reconfigure how the Fed functions. And he has five task forces. One of those is redefining inflation. The second is analyzing communications. The third is how they collect data. And there's others. But to me, that is all new challenges for the market to understand because they are very used to a cadence of press conferences.

35:39Prior to Powell, though, a press conference after FOMC rate decision was not the norm. And it sounds like Kevin Warsh might only do it when he has something to say. He also doesn't want to provide forward guidance any longer. So markets have to find a proxy for forward guidance. It may end up being prediction markets. And then he may want to redefine inflation, but that's going to be tough when he himself wants to keep inflation at, you know, to get to 2 % first, but then 2 % inflation on what measurement? You know, the second challenge is going to be the unlocking of all the IPO liquidity. So for SpaceX, that really starts in the fall.

36:23The third is this war with Iran is creating a cumulative and growing deficit with petroleum products because the Strait of Hormuz isn't back to normal. And even though gasoline is plentiful in America, it doesn't mean like lubricants and other petroleum products are plentiful everywhere else. and I mean it's the I mean I'm being literal but like it's oil that greases the machine right like you know is there going to be problems somewhere like I don't know that's I think it's highly uncertain and the fourth is is the margin debt is usually associated with some sort of correction in the next six months so I think between now and midterms there might be a fifth risk that emerges you know, or the fragility that we talked about that helps drive that drawdown.

37:11And, you know, as you know, corrections, once they start, they can be very, very ugly. So I don't really know. And I wouldn't want to call it top either. So, you know, we've been advising our clients to stay invested and we're still constructive because I think there's enough skepticism now. But even from that, whatever level we peak at, I think it's a big drawdown.

37:31Tom Lee:Why do you believe that it'll come ripping back so quickly? Because all of the tests that you highlighted. That's what my mind's on. And it almost seems inevitable. But of course, that's never the way to think about markets or investing. But those tests seem really important. Why do you think we'll see such a quick comeback from that correction if we see it? Whenever there has been a severe correction in the U.S. market, you know, our stance has been that these would be V-shaped recoveries, you know, and it's always been met with a lot of skepticism. Even earlier this year, you know, we had said that this, the war, the pullback associated with the war would be a V shaped recovery.

38:15You did say that. Yeah. Yeah. And many don't believe it because they would point to oil and all these uncertainties, but I think what I've realized is markets front load negative shocks. So that's why I think we, we could have a very severe correction, but unless the economy is breaking, so we actually have a negative cycle. I think that, and the yield curve will tell us, and spreads will tell us, corporate credit spreads, but as long as the economy isn't breaking, whatever correction we have will be V-shaped. And I know I'm saying something that sounds mechanical, but, and of course, you know, it'll be put to the test, but that would still be my default belief.

38:57Tom Lee:And it seems as though the market has been getting more and more V-shaped when we look at just how short these recoveries have been, the war was a perfect example. And you did say at the beginning of the year, you thought that we would see a bear market-like correction and then a whipsaw back. That is what we saw, but it just came in the form of a strange thing, which was going to war with Iran. Looking at your favorite sectors right now for the year, you have energy, small caps, financials, industrials, agreed on all of those, and then also technology. And you point out the MAG7 and the IGV, i.e.

39:36Tom Lee:software stocks, stocks that got pummeled by the Saspocalypse and then Saspocalypse 2. I'm also with you on that. But why are you long MAG7 and IGV? I believe they're both downstream beneficiaries of AI. In the same way that Scott mentioned that Amazon's a huge beneficiary of AI, and I think the financial services industry is a huge beneficiary of AI. So I think, you know, today people, investors are buying bottlenecks because there's visible growth there. But every month that passes, there's a compounding benefit taking place to people who are downstream of AI because that's companies and software.

40:19And, you know, these software companies, they're not monolithic. They have boards and CEOs and they have salespeople and engineers and they're all witnessing what we're witnessing. And there's many ways that they can benefit from AI. So to us, it's the D rating that's taken place in all of those stocks that tells us the risk reward is really attractive.

40:45Tom Lee:We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

41:32We're back with ProfG Markets. So Tom, crypto is well off its highs. Bitcoin's down, has been cut in half. Ethereum's lost about two-thirds of its value. Your firm Bitmine, a digital asset treasury, yesterday bought over 40 million of Ethereum. Why are you bullish? The reason we were bullish on crypto at the start of this year and really for the last 10 years is that crypto currencies and blockchains do solve an important problem, which is how do you do trusted transactions between two untrusted parties? and that type of settlement and finality has been proven because you know bitcoin and ethereum in their entire history has never recorded a fraudulent entry um and that is why like wall street is building token tokenized assets and building stable coin rails and i think over time i think using blockchain actually as a replacement for a lot of the legacy financial rails For instance, there's a Goldman Sachs conference in Europe, in London today, and the number of attendees is actually almost tripled from a year ago.

42:46Similarly, I'm bullish on crypto because I think as agents and AI become a lot wealthier, and we're starting to see agents create wealth for us and robots create wealth for us, But to us, the opportunity is that we may be reaching a point where agents actually own more wealth than we do. And I'm going to call that the, quote, uncanny valley of wealth, that there may be a point in time where if our delegated agents make more money than us, we're going to wonder if we work for them or they work for us. And I think that is the reason why crypto and a lot of the technologists are starting to realize that crypto is really one of the ways for humans to control the future role of agents.

43:37So I think those two megatrends are still in place, but crypto prices have been absolutely terrible this year. I think part of it is macro. You know, the monetary policy is not dovish. It looked dovish six months ago. Right. Market was looking for two cuts. Now it's two hikes. That's a headwind. The Clarity Act, which was supposed to help provide and create federal preemption of cryptocurrency rules and let the CFTC essentially have purview over that industry. You know, that's still stuck in the Congress processes. and um ai of course has done so well that i think it's not only taken away attention but it's actually taken away investor capital so i think those are to me uh headwinds but they're not creating what i call intermodal replacements i think blockchain is still going to be central to the future of the financial services industry and actually to how we manage ai two companies that have

44:38Tom Lee:are huge companies, extremely profitable, got absolutely murdered so far this year. I think that is a fair characterization. Microsoft down 24%, price to earnings of 22. And Meta down 15%, price to earnings of 20. What do you think of those companies? I'm very confident both are going to play the future way smarter than the market believes at the moment. They both have a long history of proving that they understand major existential pivots that are needed. And so today it's kind of easy to say, oh, well, Meta's got an issue because they're spending so much on hyperscaling and they're no longer a free cash story.

45:28But that is an incredibly talented organization. And, you know, Mark Zuckerberg has proven to make very, very smart pivots. So I'd have a lot of confidence that they are going to navigate this very well, even though, you know, their financials look like they're in potential transition. And similarly, Microsoft, I mean, Microsoft, even, I mean, just to sort of demonstrate their, I think, their foresight, you know, they are, they've made some very smart investments in AI and look at how they've become so big in cloud. So to me, I think that they have a dashboard, that they do have a pretty decent crystal ball.

46:07And so I'd be confident that both companies navigate this really well in the next couple of years. I'm with you on that.

46:14Tom Lee:Looking at the stocks that have crushed this year, it's basically like semis. And there's some interesting data from Torsten Slock at Apollo, which is that semiconductor stocks now account for 19 % of the S &P. so there's literally a fifth of the entire market it was below 10 in 2025 um i'd just be curious to hear how you think this semiconductor story is going to play out because that that's really what's driving the market we could even look at like the small caps the russell 2000 again a lot of that growth is coming from these sort of like more niche ai plays it's not coming from the more sort of value stocks that you might think about when you think of small caps.

46:59Tom Lee:It's really like the whole market is semis at this point. How do you think that's going to play out? Do you think there's room to run there? And why has it been such a violent swing to the upside so far? You know, semis, you know, historically been a very cyclical group. And, you know, and you traded them on book-to-bill ratio. But over the last couple of cycles, you know, that's become less the story. And, you know, the very question you're asking is, you know, is this a long cycle or has something changed, you know? Yes, exactly. And for the moment, like for 2026 and maybe even 2027,

47:44neither will actually matter because in the near term, the visibility is very good. I might guess that semiconductors are in a new cycle, a new story, only because if we look at the last 50 years, every semi-cycle didn't really have a change in the TAM. It was the same set of buyers, and there might have been capital raised, and you had the bullwhip effect affecting everything from semi-cap equipment to the semis. But this time we're looking at robots which are very semiconductor intensive versus an iPhone. The amount of semiconductors that you need to put into a robot is what, I mean, I don't know the number.

48:37I'm going to guess, is it 50 times versus what you need in an iPhone? So all of a sudden, every new autonomous robot that you deploy, which is going to save you money as a labor tool, is very semi-intensive. and then, of course, there's going to need to be, if there's semiconductors and space, you know, I mean, what conditions do they have to survive? I mean, they're going to be quite unique, and so I think there's a chance that it is a new story for semis.

49:04Tom Lee:Yeah, it does seem like that's exactly as you put it. Is this a big cycle, or has something changed? Yeah, I think it's, I think both are pretty reasonable outcomes, and it's a really tough one. And just as we start to wrap up here, some of the stuff that you mentioned in terms of risks, you had your big tests this year. The Fed gets tested, the unlockable, all of the IPOs like SpaceX, especially the petroleum product shortages. One other new risk that's kind of been on our radar is this issue of how expensive AI is, not necessarily just for the foundation models, but for enterprises themselves.

49:50Tom Lee:And a lot of these companies are now shifting to these cheaper, open-weight, open-source Chinese AI models because they can't afford Clawed and they can't afford OpenAI's products, etc. That seems like it could be a real issue for American companies if suddenly everyone just starts deciding to switch over to Chinese models. Do you view that as a risk? And how do you think about that shift? The high cost of AI and the apparent, you know, abundance of capital is creating competition. And, you know, competition is intermodal because, you know, there may be people who create open sourced models that also don't even charge anything, but they try to monetize it somewhere else.

50:37And I think that that's the trade-off every future user has because, of course, no model from China is going to be free. I mean, it might have great capabilities, but the risk is, you know, what is the, quote, rent-seeking business model of that other model. And if it is deployment and they just want China AI to spread, then I think things are fine. But if there's a surveillance element or, you know, a capture, then that poses, of course, a lot of risk to businesses. Because, as you know, that was really an early mistake for a lot of users of these AI models was sharing too much data. So I think it's, you know, I think it is a risk that's worth watching because, you know, it's creating enormous incentives to find intermodal replacements, you know, for expensive models.

51:32Emerging markets up 25 % a year to date, more than double the S &P's gain. And that's after increasing 34 % last year. One of our big themes was we saw a rotation out of or flows reversing for the first time in the better part of two decades back to emerging markets. Your thoughts on the U.S. versus emerging markets? I can believe the emerging markets outperformance thesis. I actually only focus on the U.S., but to me, AI is a whole new infrastructure build, and there's going to be infrastructure partners to this process. Korea has proven to be one. So to me, for every advancement in the AI story, Korea has a beta to that.

52:19And it's not just going to be Korea, it's Taiwan, and I'm sure a lot of emerging markets. So to me, structurally, it makes sense that some countries should outperform because they might have higher beta to this structural story. And therefore, their economies will outperform and therefore stocks.

52:38Tom Lee:Tom, we always love having you. And we appreciate getting your more bullish perspective, although with the caveat that you do believe that we'll see a correction the second half of the year, but that it'll be V-shipped and we'll come right back. This is more on the crypto side of things, though. Obviously, crypto has gotten pummeled this year, Bitcoin and Ethereum. But I know that you're bullish, specifically on Ethereum, and you're bullish on the stock market, too. I'd be curious to know, what would change your mind to basically say, actually, no, the price is going down? I mean, what would it take if we saw continued pain in the crypto markets, as an example, if we get to, say, June of next year and Bitcoin is hovering around, I don't know, 40 or 50?

53:29Tom Lee:I mean, it's all hypothetical, so I'm not even sure how much value it has. But would that change your mind on things or what would? You know, crypto is hyper volatile. So, Bitcoins fall from$120 ,000 to$58 ,000, and Ethereum, which is beta to Bitcoin, falling from$5 ,000 to$1 ,600, that falls still within the historical parameters of the crypto, bull, and bear market cycles. So, price hasn't moved to a level that would say anything's broken. But what has been broken is the fact that stocks have done well this year and crypto's done badly. And I think part of it is some of the macro things that Scott and I discussed, like the Fed becoming a little more hawkish and AI really taking away some capital and the Clarity Act and the positive exemption that would come with it not happening just yet.

54:33But none of those really break the crypto story because as a, quote, mousetrap, blockchain is still the best way to still transmit and store value and record transactions without trust. And that's why I think Wall Street is still going to build and is rapidly building on blockchains. It's just not happening to our everyday lives just yet. And for the same reason why I think a lot of the AI engineers are tinkering with using blockchain to manage future agents to protect us because as AI becomes quite wealthy, humans might be taken out of that economic loop. you know um so i think that's why to me bitcoin will make a full recovery you know i i i believe you're going to see bitcoin over 100 000 by the end of the year and ethereum you know back to over 5 000 so i you know i think investors patience is clearly tested uh because we've i think bitcoin's been down three quarters in a row um but i think it's never been down four quarters in a row so this would be a test that if they don't balance from june to september then you're right maybe something's broken.

55:42Tom Lee:Is there a price point at which you would say, yes, it is broken, the story is broken, and it won't work anymore? Do you ever think about that? For Bitcoin, the way to look at it is its production cost, because there is a cost of mining to find the next block. And I think Bitcoin is like 5 % below production cost right now. if bitcoin falls below 50 percent of production cost it literally said it means you just take down the network it you can't support managing the bitcoin network with its current price i mean that to me you know that that would be the equivalent of like jp morgan trading at half a book value yeah so okay that's that's helpful context um final question when you think about your investment philosophy, you're kind of bullish by nature.

56:38Like you think about what could happen

56:41Tom Lee:in the future, how things could change in the right ways, what robots could do, what agents could do. And it's a great, I think it's a great way to think about investing. My final question, like, how do you stay so bullish? What is your investment philosophy that drives your views at this point. One of the things that I learned from my earliest days on Wall Street, because this is my 35th year as a research analyst, is that I think that there is something unique about U.S. innovation. You know, I think that the U.S. structure of creating incentives for innovation And I think somewhat positive regulatory backdrop and the ability for companies to innovate and constantly innovate, and I think companies continue to innovate, is the reason I've been optimistic.

57:42I think COVID was a really good example of that. You know, the whole world shut down. And around the world, many companies suddenly saw a collapse in earnings. but in the U.S. through a variety of measures including government spending S &P earnings actually grew but it was a lot of good companies making good decisions too so I think as long as that vitality and dynamism exists in America then I think I can stay constructive but you're right a business cycle will end and of course innovation could end you know if America becomes uh has what we call Dutch disease and no longer seeks to innovate, then another country will take the lead.

58:20Tom Lee:Tom Lee is the co-founder, managing partner, and head of research at Fundstrat Global Advisors, a leading independent research firm. He has more than 25 years of experience in equity research and has been top-ranked by institutional investor every year since 1998. Prior to co-founding Fundstrat, he served as JP Morgan's chief equity strategist from 2007 to 2014. Tom, Tom, this was awesome. We really appreciate your time. Thanks, Tom. Thank you. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalon, Isabella Kinsel, Kristen O'Donoghue, and Mia Silverio.

59:01Tom Lee:Jake McPherson is our social producer. Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

59:22Lifetimes

59:27You have me In kind reunion

59:38As the world turns And the dove flies in love, love, love, love.

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