Tom Lee: The Market Can Climb Higher—But Expect Turbulence | #630
Tom Lee, co-founder of Fundstrat Global Advisors, discusses his bullish market outlook with a S&P target of 7,700 for 2026, while warning of potential mid-year turbulence tied to a new Fed chair. He covers topics including oil market dislocations, sentiment survey distortions, crypto adoption, and the success of his Granny Shots ETF.
Summary
Tom Lee opens by reflecting on market resilience despite ongoing geopolitical conflict and high oil prices, noting that the S&P 500 has reached all-time highs while AI and semiconductor stocks continue to lead. He explains his December 2025 forecast calling for a strong start to 2026, a mid-year pause driven by uncertainty around a new Fed chair, and a year-end target of 7,700 for the S&P 500. He expresses concern that oil prices do not yet reflect an acute supply shortage developing globally, calling it an unresolved unknown that could surprise markets negatively later in the year.
Lee discusses the importance of credit markets as a leading indicator for equities, noting that divergences between high yield spreads and equity weakness often signal structural bottoms. He uses Oracle's CDS spread widening as an example of potentially misleading signals, pointing out that Oracle's default risk ranks at the market's midpoint, making bankruptcy narratives overblown.
On sentiment, Lee argues that current investor psychology is inconsistent with a market top because sentiment turns bearish very quickly on small pullbacks, and positioning data shows rapid short-selling surges. He attributes persistently low University of Michigan consumer sentiment to survey methodology changes and political skew — the survey's online-only format now draws roughly 66% Democratic respondents, and some respondents report implausibly high inflation estimates like over 100%, distorting the results.
Lee discusses the potential wave of major IPOs including SpaceX, OpenAI, and Anthropic, which he says could collectively exceed the entire dot-com era IPO wave in inflation-adjusted terms. He acknowledges the mechanical supply challenge of lockup expirations releasing trillions in stock, but argues that public equity allocations by family offices and pensions are near record lows after years of alternative investment preference, suggesting demand exists to absorb new supply.
Regarding Granny Shots (ticker: GRNY), Lee explains the fund launched in November 2024 and has grown to $4.4 billion in AUM, with a sister small-mid cap fund (Granny J) bringing total AUM to $4.9 billion. The strategy identifies seven structural themes — including global labor shortage, AI, energy, cybersecurity, sovereign security, millennials, and manufacturing cycles — and selects approximately 35-40 stocks that appear in at least two themes. NVIDIA, Chevron, Google, and Meta currently appear in the most themes. The fund has outperformed the S&P 500 by roughly 450 basis points in its first year.
On crypto, Lee disputes Jeffrey Gundlach's 'boomer' characterization as an insult, arguing it reflects institutional validation of blockchain's utility. He highlights tokenization of financial assets and AI's need for neutral identity and transaction infrastructure as key drivers. He notes that Tether, with only 300 employees, is on track to earn $15 billion this year — enough to rank as the eighth most profitable bank in the world — illustrating how blockchain-native firms are disrupting traditional banking at a fraction of the headcount.
Lee closes with personal investing stories, including a 2004 call on Western Wireless at $1.72 — identified as a buy after noticing bond prices rallying while the stock was still declining — which was subsequently acquired for $40 per share. He also recalls the difficulty of maintaining a contrarian sell rating on Nextel at JP Morgan, which reinforced his views on the personal costs of being contrarian.
Key Insights
- Lee argues that 11 of 13 new Fed chairs have seen at least a 10% market drawdown in their first year, making mid-year turbulence likely as markets test the new Fed leadership.
- Lee claims the University of Michigan consumer sentiment survey is structurally distorted because its online-only format now draws approximately 66% Democratic respondents, and some respondents report current inflation above 100%, rendering the survey unreliable as a market signal.
- Lee contends that at major market bottoms, high yield credit spreads stop widening before equities recover, making credit divergence from weak equity prices the most reliable structural bottom signal.
- Lee argues that SpaceX, OpenAI, and Anthropic's combined IPOs could inflation-adjusted exceed the entire dot-com IPO wave, but believes the supply will be absorbed because institutional allocations to public equities are near record lows after a decade of alternatives dominance.
- Lee highlights that Tether, a crypto-native stablecoin issuer with only 300 employees, is on pace to earn $15 billion in 2025 — which would rank it as the eighth most profitable bank in the world — illustrating blockchain's potential to displace traditional banking with a fraction of the labor.
- Lee's Granny Shots strategy selects stocks by identifying seven structural themes and buying only companies that appear in at least two themes simultaneously, resulting in a 35-40 stock portfolio where NVIDIA, Chevron, Google, and Meta currently rank highest by theme overlap.
- Lee argues that AI will disproportionately benefit American workers and entrepreneurs because the U.S. cultural disposition toward starting businesses — where over 90% view entrepreneurship favorably versus nearly 98% opposition in Japan — will lead Americans to use AI as a launchpad for new ventures.
- Lee recounts identifying Western Wireless as a buy in 2004 at $1.72 by observing that company bonds were rallying while the stock continued declining — a credit-equity divergence signal — and the stock was subsequently acquired for $40 per share within 18 months.
Topics
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