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Joe Terranova, Tom Lee, Head of Research at Fundstrat, Chief Investment Officer at Fundstrat Capital, and a CNBC contributor. The last indicator that interested you, Tom, is the employment report. In your opinion, the previous August report may have been somewhat atypical, and from this you conclude that any inflationary pressure from the labor market is unlikely.
So, you are again holding the view that if oil prices can be brought under control , inflation may cease to be a problem. Yes, good morning, Joe. This is true. I think before last week's jobs report, the market was expecting the Fed to be as hawkish as possible—with three rate hikes, including a 75% chance of a hike in October.
This employment report was softer. We will receive the September inflation report in two weeks. That's right. In our view, one-off factors are fading away, so I believe we will see lower inflation rates over the next six months. This will not only allow the Fed to soften its hawkish stance, but will also help normalize bond yields as inflation uncertainty begins to subside.
There are plenty of clues, as tech stocks are hitting new highs and cryptocurrencies are showing success —they wouldn't be feeling this way under tight monetary policy. So I think they expect financial conditions to ease in the future. So, you analyze signals in different markets to understand what is happening.
That would be a strong argument, Tom. When you say yields are normalizing, what do you think the normal 10-year yield should be right now if it weren't for these "false signals" in the markets? I think the benchmark we can work with is 4.75% on the 10- year bond before the Jackson Hole performance. And I believe that any level below 5% will be perceived by the markets as a very positive signal for risky assets.
I mean, there is a high probability of seeing yields below 5% over the next six months. You also predict a rise in the S&P index by the end of the year, perhaps as much as 9%. So you expect around 8200 or even 8400 points. You characterize the current market as you always do— constantly going against conventional wisdom.
You think this market is like a compressed spring, ready for significant growth, as if it has been held back, even though most people think it is overheated and growing only thanks to AI. Yes, I think we are living in unprecedented times, as earnings growth is accelerating—this is hard for many to believe, but even third- quarter earnings are likely to show almost 30% growth.
And earnings per share (EPS) revisions from the beginning of this year to now for 2027 figures have increased by more than 20%, while the S&P has not even increased by 20%. So, the multiplier has actually decreased. If anyone thought the market was expensive at the beginning of the year, it has actually become cheaper now.
And I think that, paradoxically, high oil prices, because the US is an exporter, actually strengthen the US economy. So I understand that this is a very difficult situation, but I think there is excessive pessimism, because not only are the earnings forecasts good, we also see the leadership of stocks that benefit from lower inflation, which is the technology sector and, you know, cryptocurrency.
You also seem ready for a market pullback at any moment. It could still happen, and you've been talking about it for some time now. In fact, there was a point when you thought even an S&P 6 at the beginning was possible by the end of the year, and then it went back up to the high seven or eight hundred levels.
So, would this be a kind of midterm election panic, or what would that cause? The midterm elections are indeed getting closer and closer. I wonder how much it is? It was 35 days. Has another week passed? Is it 28? It's like a zombie movie. 28, 28 more days. It's only about 28 days before them? I mean, the correction has an expiration date , partly because I see the midterm elections as the event that will clear things up.
You know, this will probably be a very clear risk signal to the markets, regardless of the outcome. And since June 30, I think the markets have been difficult. So in part I think we've already had a gradual correction, and, you know, we've had a lot of different groups that have already experienced a downturn.
But as for a larger pullback in the markets, I still believe there could be some headwinds from mid-October until the midterm elections. Mhm. I am somewhat reluctant to make such strong statements simply because the sentiment has been negative, and I believe that when people are pessimistic, it is difficult for markets to “get ahead” as we know that people back up their words with actions and remain cautious.
Yes. That's the one thing that always, uh, never changes, right? When you see things in front of you that are negative or frightening, that is what most strategists use to predict what the market will do in the near term. They do n't learn anything. They never truly understand that there is actually a discounting mechanism for the market.
So, you said, regardless of the outcome. So if the Democrats take the House and the Senate, don't you think that would , uh, cause some concern in the stock market? Um, I think the market loves a stalemate, so Democratic control of Congress will be perceived as a stalemate. AI and cryptocurrency stocks have stalled due to the midterm elections due to the perception that Democrats do not support data centers and do not support the Clarity Act.
But our position is that after the midterm elections, Democrats will start supporting data centers and the Clarity Act because, first of all, data centers typically bring a lot of economic benefits to the community, and the Clarity Act had a lot of support among Democrats. So I, I think AI stocks will benefit after the midterm elections because the change in Congress will actually give some projects a "green light," so to speak .
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