What and When to Buy Now with Tom Lee

Our viewers and financial advisors, they know you for your, your market views. You've been positive on the markets during this bull market, maybe a little before that. I'm interested though to start, if you could just quickly summarize your process, how do you arrive at a market outlook? Obviously you're synthesizing fundamental and other factors, but if you could characterize your approach, what would you say it is? Well, it's probably pretty conventional in the sense that we spend a lot of time thinking about the E, the earnings power of the S&P 500 and then we think about the P part, the price to earnings ratio. But not that we try to target an absolute PE level, but whether the multiple can go up or down and the reasons we've been staying constructive on markets is that really since COVID, I think companies went through a huge stress test and they showed that they are really good at adjusting to inflation shocks, supply shocks, economy shut down. And so we think the earnings power is much better than people realized historically. And and of course now the cost of borrowing is so low that they borrow at some lower cost than many countries. So companies are basically governments now. And on the multiple, I think that there's been a misperception that well when interest rates go up, PE has to go down. But since 1920, there's a sweet spot between interest tenure at between 4 and 7% where multiples actually go up. And so the idea for us for staying constructive is that we think there's upside to earnings and especially because you know it's US centric companies doing well. And the the 2nd is that the multiple has room to expand, you know between 4 and 5% that the PE historically since 1937 is around 20 times forward. If earnings are still going higher and have room perhaps even to be higher than the consensus right now, presumably the overall economy is going to be holding up well as well. Where does that leave you with regard to the interplay of inflation, Fed policy, interest rates and the economy? Yeah, it's it's a very tricky alchemy because I think that it's very easy for someone to say, Oh well, inflation if it's up, it's good for earnings. So if it goes down, it's bad for earnings and a lot of people got tripped up on that because reality is a lot of companies are have inverse correlation to inflation. Great example is technology is inversely correlated to inflation. So their margins actually go up if inflation is falling. And with regard to the Fed, again you know the Fed is it's tricky because it's unknowable. I mean I have no insight into what the Fed is going to do. But in general, I think that we've been more optimistic that they're going to achieve their idea of a soft landing. So we've lend, we've leaned that the Fed is more dovish than people perceive. You know, we actually have a viewer question right along these lines, which is that, you know, shelter cost, of course, a big part of why reported inflation remains as high as it is. And yet a lot of folks don't want to move because maybe high interest rates are holding them back or maybe that's reducing the affordability. So in other words, would lower rates potentially help The one thing that's keeping inflation as high as it is? Yeah, I've heard that argument. I think it's actually really well and and it's counterintuitive because you'd think, Oh well, if you cut rates, shouldn't home prices shoot up. But you're right, if it's liquidity that's keeping homes from moving and you know, a proper equilibrium of housing, it's it's absolutely dead on. And and there's also this excess premium right now on mortgage rates. The 10 year versus mortgage rates is, is almost 100 basis points wider than it should be. So as as soon as Fed starts cutting, that collapses and it makes housing affordable. Yeah, like 2 1/2 percentage points at this point, I guess, right. Yeah, we have to talk about, I guess, the innovation part of this market, which has been a huge source of energy for the upside in stock. So we have NVIDIA reporting today really at the center of this massive investment boom. It's also responsible for a big chunk of of the upside for the S&P this year. So how do you handicap where we are in this trend and what a is payoff is ultimately going to look like? Yeah. You know to us when we, we did a study looking at what happened, what drives innovation cycles in America. And believe it or not the two biggest innovation cycles in the US which is 1948 to 57, which was a boom time and 1991 to 99 were two periods when the world was short structurally of Labor. So you had a prime age workforce growing slower than the total population, which means there was a lot of pressure on either wages or ways to innovate to produce more output. We've gone into a period of structural deficit of prime work, prime force labor which is going to last till 2045, which means another tech cycle I think is under way. And for for viewers, it's not just like NVIDIA makes chips and you got to buy it. It's just that there may be an 80 million prime age workforce shortage globally. That's $3 trillion of wages that won't be spent on labor. Nvidia's revenues are 100 billion. So to us this is really early stages for the amount of money that will be spent on generative AI. So $3 trillion over what, 20 years that would otherwise have been spent on labor and it's 3 trillion a year. So it's actually close to 6% of GDP. Got it. OK. And so that in theory would be the source of the investment on an ongoing basis on productivity measures like it's yes, in simplistic terms it's it's taking wage costs to to silicon. Yeah is really the theme. And do you think the market has kind of caught up to this opportunity or do you think it is still just unfolding everyone wants to kind of put the current experience and the framework of of the 90s boom and and sort of try to track where we are if that's possible. To me it's really early. I mean I give you a simple example like you know Cisco had gotten to almost an 80 PE at the peak in 99 selling $100 router. Yeah, NVIDIA is selling nearly a six figure GPU chip in AI chip and it's trading at 30 times earnings. So I I would say that maybe when if it's multiple gets to 200 times, it's incredibly expensive, but at 30 times for a chip, no one else makes it seems pretty scarce. Yeah, it's an interesting moment in the market in terms of what is working and how this eclectic mix of things. So yes, we have a lot of fixation on AI related equities, but also this is sort of global reflation themed. Some commodities are doing well. Financial stocks have improved to some degree and yet some domestic cyclicals maybe have softened up. What's your read on that? And I guess in particular if we want to get into commodities and energy and whether that is a durable trend, yeah, it's important to watch actually because you know when commodities do well, it could be an inflation signal. Sure. But it's probably also the idea that investors are recognizing power generation is central to AI. It's just as important as having a unit of money available. That's why financials are doing well and energy stocks are doing well. But I but as bears watching because of course the more commodities go up, the greater risk it feeds through to CPI, which of course would change the Fed stance. So it's undetermined, but I so far I'd give it the positive spin, sure. And you know it is at some point you mentioned the Cisco example, but at some point this idea like we're never going to have enough power or too much power or you know, too much capacity computing capacity for the opportunity of AI. It's something like in 1999 saying we're never going to have enough broadband capacity, never enough fiber in the ground. Maybe that was true, but it didn't necessarily benefit specifically those companies building out the infrastructure. Yes, I remember that really well because I was a wireless analyst, 99 and C Lex were the big story and all the fiber being laid around the rail lines. The one thing that was really tough when I saw the models for C Lex was the discount rate was like 4% and the terminal multiples like 30 which meant they were really fudging numbers to justify their non earning companies. Today NVIDIA of course is 30 times earnings and selling $100,000 chips. So it's it seems early but you're right and fabulously profitable. Sure we should talk about the election both in terms of market patterns, what to expect perhaps based on on history but also what's at stake in terms of economic policy or investment experience. Yes. Well, we surveyed our clients yesterday for our webinar. We had almost 3000 responses. And interestingly, we asked not who they're going to vote for, but we said who do you think is going to win the White House in November? And the overwhelming majority is actually not the incumbent, right. And to me, I'd say the two sectors that would benefit from that is 1, is that I think there's a Bitcoin bifurcation. You know, Trump is actually pro Bitcoin. So I think to the extent Bitcoin does well that's what's implied by his potential win and energy should be going down because more drilling should pressure oil prices. So I would watch those two sectors. I think that there's, I think it's an important election because of the direction of this country. From a financial markets perspective, it may be less important. Well, it's interesting because we do have some results of the, the poll of the group here, which mirrors what you said about 62% predicting that Trump would win head to head against Biden. And also what's interesting, you mentioned Bitcoin. About 2/3 of advisers said they would not at this point recommend Bitcoin to clients and it's more like about 8% would strongly recommend and you know 20 something percent says maybe somewhat recommend. So I guess that could be played either way in terms of where we are in adoption. That's right. And it's, you know Bitcoin, it's, it's very controversial asset. In fact many don't think it's an asset and I appreciate those who have traditional financial models that can't value Bitcoin. But to me it's a, it's a hedge against future uncertainties and I think that's really what Bitcoins really served. Well you know you mentioned that you know maybe oil could be pressured. We are drill, we are drilling at record levels at the moment. I just wonder how much of that is is going to be incremental supply that we can expect in the markets going to discount. Yeah, that's right. I mean you know the reality is I think the US has so much very expensive oil that it can extract, but there have been a lot of restrictions and approvals for additional drilling. And so I think that there could be a lot of CapEx, which might be good for the economy, but but you're right, it might be bad for prices. But you're right, we might be at capacity. I don't know. We have a huge CapEx boom. It's kind of amazing. I mean obviously a lot of it's fiscally driven, but we'll see if we can build all the stuff that we have budgets to build at the moment. I guess the other wrinkle is that in terms of the historical patterns, the market has never been down, I guess in the three months leading up to an election when an incumbent has won. So I don't know if the market is going to have a rethink of exactly what the implications would be of either direction, but we'll have to wait and see. I did want to get your thoughts on something more big picture and generational, which is this expected wealth transfer that's going to going to occur. And we did also have some some commentary on that here today and about what perhaps the heirs might or might not do in terms of looking for advice on those assets. But what are the implications as far as you see of this coming transfer? Yes, it's it's probably one of these things that the timing is unknown, but we know that over the next 20 years, roughly $100 trillion will be inherited by a generation of millennials, which is one of the largest wealth transfers ever in history. It's more net worth than the entire net worth of China. So one thing to keep in mind is if we're pledging or shifting assets to a cohort that is, you know, 30 or 40 years younger than the people who've controlled it, how will they change what they do? And I think it has a lot of impacts, including ESG, but I think it has a lot to do with their preference for income versus capital gains. To us, that's really what it means for stocks. It could really rise dramatically. But there's a lot of social implications of Many surveys that we saw even five years ago showed young people trust technology companies more than governments, which means that they're going to support tech and innovation. And I think that's why technology in the US is going to actually do quite well in the US So you feel as if to be a somewhat higher risk tolerance of that money and then also a little more favorability toward technology and innovation. That's right. And it it makes a lot of sense because young people are the ones who really adopt technology and can see innovation. And if generative AI is the big move for this new generation, they're going to really support the expansion of the capabilities, which, you know, could be good or bad. I don't know. Yeah.