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Wall Street is caught in a wave of intense skepticism right now, but Fundstrat's Tom Lee is taking the exact opposite side of that consensus trade, arguing the market is actually a coiled spring set to surge 9% into year-end. He joined Joe Kernan on CNBC recently to make the case that investors are wildly misjudging inflation and corporate earnings.
And the underlying data suggests this bull market may have far more room to run than the crowd believes. ; Join us now, Tom Lee, head of research at Fundstrat, chief investment officer of Fundstrat Capital, as well as a CNBC contributor. The latest data point that uh you're interested in, Tom, was that uh that unemployment or that employment report, which in your view uh means that the previous one in August might have been a little bit of an outlier.
And from that you glean that any inflationary pressures from the labor market are unlikely. So, you're back to thinking if if oil gets under control, inflation might not continue to be a problem. Yes, good morning, Joe. That's right. I think going into last week's jobs report, the market had been working with a maximum hawkish Fed, one that was going to raise three times, including a 75% chance of an October hike.
This jobs report has been softer. Um we get an inflation report in 2 weeks for September. It does, in our view, b- we believe there's these one-offs rolling off, and so I think there's over the next 6 months softer readings on inflation, and that allows not only the Fed to kind of walk back from its hawkishness, but I think it's going to allow bond yields to actually sort of normalize because there the inflation sort of uncertainty starts to ease.
And I think there's a lot of clues cuz I think tech stocks making new highs and crypto doing so well, these can't do well in the face of tightening monetary conditions. So, I think that they're anticipating easier financial conditions ahead. So, you're reading the tea leaves in in different uh markets for what's going on.
That would be significant, Tom. So, you think what when you said yields will normalize, what do you think a normal yield right now for the 10-year would be if there weren't these what you think I think are head fakes in in different markets. I think one number we can work with is before Jackson Hole, the 10-year was at 4.75% and I think anything under 5% would be interpreted by markets as really uh positive for risk on.
And I mean, I think there's a good chance in the next 6 months we're going to see yields below 5%. You also are looking before the end of the year for maybe as much as 9% higher on the S&P. So, you got maybe 8,200, maybe 8,400. And you you call the current market, which I think once again you're you're you're you go so against conventional thinking all the time.
You think this market is a coiled spring ready to go much higher, almost like it's been held back even though most people would think that it's sort of out over its skis being boosted only by AI. Uh yeah, I think we are in an unprecedented time because earnings growth is accelerating, something that many people would find hard to believe in their lifetime, but even Q3 earnings are probably going to come in at almost 30% growth.
And PE sorry, EPS revisions from the start of this year to now for 2027 earnings are up more than 20% and the S&P's not even up 20%. So, the the multiple actually has come down. If someone is thinking the market was expensive at the start of the year, it's actually gotten cheaper. Uh and then I think that ironically oil prices being high because the US is an exporter is actually strengthening the US economy.
So, I I I know it's a very complex situation, but to me, I think there's excessive pessimism because not only is the earnings visibility good, but we're also getting leadership from the stocks that anticipate weaker inflation, which is tech and you know, crypto. You also I think are ready at any time for a drawdown.
That that could still come and you've been talking about that for a while. In fact, there is a one point you thought even a six handle on the S&P was possible before the end of the year and then a move back to maybe the high sevens or eights on the S&P. So, that would be a midterm sort of a freakout or what what what would cause that?
We do have the midterms getting closer and closer. I think it's what is it? It was 35 days. Did we Did another week pass by? Is it Is it 28 That's a zombie movie. 20 another 28 days. Is it only about 28 days away? Uh I mean, I I think there is an expiration date for a correction partly because I think the midterms is a clearing event.
You know, that's probably going to be a very big risk on signal for markets regardless of outcome. And since June 30th, I think the markets have been tough. So, part of me thinks we've had a rolling correction and that's you know, we've had a lot of different groups in a drawdown. But, as far as a bigger drawdown in markets, I'm still kind of holding a view that from mid-October to midterms is where a speed speed bump could happen.
Mhm. I'm kind of reluctant to sort of be that declarative just because sentiment's been negative and I think when people are bearish, it's hard for markets to be over their skis because we know people are actually speaking with their sentiment and staying cautious. That's That's the one thing that always uh that never changes, does it?
When things are staring you in the face that are that are negative or scary, that's that's what most strategists will use to predict what the market's going to do near term. They never learn. They never really learn that that there really is a discounting um mechanism for the market. So, you say regardless of outcome.
So, if the if uh the Democrats were to take the House and the Senate, you don't think that that uh would would cause uh any consternation in the stock market? Um I think one market's like gridlock, so having Congress controlled by the Democrats would be viewed as gridlock. The AI stocks and crypto stalled because of midterms with the idea that Democrats don't support data centers and they don't support Clarity Act.
But our country and take is that after midterms, the Democrats are going to start supporting data centers and Clarity Act because one, data centers are generally providing a lot of economic benefits to the community, and Clarity Act had many Democratic supporters. So, I I think the AI stocks are going to benefit post midterms because you know, the change in Congress is not is actually going to sort of greenlight some projects.
Joe kicked off the conversation by diving straight into the macro environment, zeroing in on the latest employment numbers. His angle was clear. If the prior blowout jobs report from August was just an anomaly and labor market pressures are finally cooling off, then as long as energy prices behave, inflation might cease to be the monster everyone fears.
Joe pushed Tom directly on whether this softer labor data was genuinely enough to break the back of the hawkish interest rate narrative that has been haunting equities for months. Tom did not hesitate to confirm that thesis, walking through the shifting mechanics of the rate market. Heading into that recent labor print, investors have been bracing for a maximum hawkish Federal Reserve, actively pricing in three more interest rate hikes, including a staggering 75% probability of an increase arriving in October.
But Tom pointed out that the entire premise began unraveling the moment the softer print hit the tape. He argued that with upcoming September inflation data rolling off previous one-time spikes over the next six months, the Fed will have the cover it needs to walk back its aggressive posture. More importantly, he highlighted that bond yields should finally begin to normalize as inflation uncertainty fades.
To back that up, Tom pointed to market internals that most casual observers miss. High beta tech stocks carving out fresh highs and cryptocurrencies rallying aggressively. In his framework, risk-sensitive assets simply cannot thrive in the teeth of sustained monetary tightening, meaning their strength is actively front-running easier financial conditions ahead.
My take on that dynamic comes down to how institutional liquidity behaves long before it shows up in backward-looking macroeconomic releases. When speculative corners of the market like crypto and growth equities catch a strong bid, it typically tells you that institutional liquidity is quietly loosening beneath the surface.
Where I would introduce some caution is in assuming energy prices will simply cooperate on cue. High oil prices do not vanish just because labor demand softens, and if energy remains sticky, the Fed might find it much harder to pivot than Tom expects. Still, his observation about market internals acting as a leading indicator is tough to poke holes in.
That mention of normalizing yields was exactly where Joe stepped in next, pushing Tom to define what normal actually looks like in practice. Joe noted that Tom seemed to view the recent turbulence as a series of market head fakes, and he pressed him for a concrete benchmark on where the benchmark 10-year Treasury yield should reasonably settle once those summer distortions cleared away.
Tom went straight back to the tape, citing the 4.75% level where the 10-year yield traded right before the Jackson Hole Symposium. From there, he laid down a very clear line in the sand, stating that anything under 5% would be interpreted by equity markets as an unmistakably positive signal for risk assets.
Over the next 6 months, Tom expects bond yields to trade comfortably below that 5% threshold. Where I land on that 5% line is that it dictates the entire psychology of institutional portfolio managers. When the 10-year yield punches above 5%, risk-free cash and short duration paper become genuine competitors to equities, pulling capital out of the market.
Anchoring yields below that 5% ceiling removes that immediate capital flight risk, allowing corporate earnings multiples to stabilize rather than compress. That exchange over bond yields set up the biggest debate of the morning, with Joe confronting Tom about his broader equity forecast. Joe pointed out that Tom is looking for the S&P to climb as much as 9% into year-end, potentially pushing the index from just above 7,700 into the 8,200 or 8,400 range.
Joe challenged him directly on this, arguing that calling this market a coiled spring flies in the face of conventional wisdom, especially when most strategists believe stocks are dangerously over their skis and floating purely on artificial intelligence hype. Real quick, before we keep going, if this is landing for you, tap like and hit subscribe and I'll be right here when you get back.
Tom countered that skepticism with hard fundamental math, rather than market sentiment. He stated that we are currently living through an unprecedented acceleration in corporate earnings growth that many investors find almost impossible to believe, forecasting third-quarter earnings growth to land near 30%.
Even more compelling is what has happened to forward earnings estimates. Since the start of the year, earnings per share revisions for 2027 are up by more than 20%, while the S&P itself has not even matched that 20% gain over the same period. On top of that, Tom added a counterintuitive macroeconomic reality check.
Because the United States is now a major net energy exporter, elevated oil prices do not drain the domestic economy the way they did during historical energy shocks. Instead, high energy revenues are providing a backstop to domestic capital investment. To Tom, the prevailing pessimism is completely detached from the reality of expanding earnings visibility and resilient growth.
My take on Tom's earnings breakdown is that his math on multiple compression is solid, but it relies on those ambitious corporate guidance numbers actually holding up under scrutiny. If forward earnings estimates are rising faster than the price of the stock index, the market multiple is shrinking, meaning equities have actually gotten cheaper on a forward basis since the year began.
Where I would push back is on whether that 30% earnings pace can hold up if consumer demand slows faster than expected. Yet, you have to appreciate the analytical discipline here. Instead of getting swept up in emotional narratives about market bubbles, Tom is anchoring his bullishness directly to corporate cash generation.
When earnings expand faster than price, calling a market frothy is simply inaccurate. , oora.com. Joe then shifted the focus from valuations to volatility, pressing Tom on the downside risks. He reminded Tom that he had previously floated the possibility of a sharper pullback, even wondering aloud if a move down toward a six handle on the S&P might materialize before the index staged its broader recovery into the high sevens or 80s.
With the upcoming midterm elections looming roughly 28 days away, Joe pressed him on whether political anxiety could trigger a severe pre-election freakout. Tom offered a nuanced that distinguishes between a catastrophic market crash and an orderly rotational correction. He acknowledged that the period stretching from mid-October right into the midterms could easily bring a noticeable speed bump for the market.
But he reminded Joe that investors have essentially been living through a rolling correction ever since the end of June. Instead of the entire index falling off a cliff all at once, different sectors have taken turns absorbing double-digit drawdowns while index-level pricing held steady. Furthermore, Tom argued that the midterms represent an expiration date for market anxiety, acting as a powerful clearing event that greenlights a fresh risk-on rally regardless of which party wins.
He also pointed to negative investor sentiment as a natural shock absorber, explaining that when retail and institutional money managers are already defensively positioned in heavy cash, the market lacks the speculative froth required for a true crash. What strikes me about Tom's assessment is how well it explains the underlying resilience of this tape.
A rolling sector rotation is healthy because it bleeds out excessive optimism without breaking the broader upward trend. Where I land on his sentiment read is that defensive positioning really does create an invisible floor. It is mechanically difficult for markets to suffer a systemic collapse when institutional desks have already de-risked and parked their money on the sidelines.
Joe jumped in right there, nodding along with that sentiment reading. He remarked that strategists almost always make the mistake of looking at frightening headlines and assuming the market will drop, consistently failing to understand that equity prices are a forward discounting mechanism that already accounts for bad news long before it arrives.
But Joe then pushed Tom on the political mechanics, specifically asking whether a clean Democratic sweep of both the House and the Senate would spark real panic across trading desks. Tom's answer revealed a pragmatic view of Washington and capital markets. He reminded Joe that financial markets historically love political gridlock because divided government prevents sweeping, unpredictable regulatory shifts.
Even if Democrats were to take both chambers, Tom expects the reality on the ground to look very different from the current campaign rhetoric. Right now, capital expenditure in artificial intelligence and crypto has experienced temporary pauses because investors worry a Democratic Congress might block data center build-outs or stifle regulatory legislation like the Clarity Act.
However, Tom laid out why he believes those specific fears are overblown. Once the election concludes, he expects lawmakers across both sides of the aisle to actively support data center expansion because these projects inject massive capital investment and high-paying jobs into local communities. Similarly, digital asset frameworks like the Clarity Act have historically enjoyed bipartisan backing from moderate lawmakers, meaning that once the posturing ends, the regulatory overhang that has stalled key growth sectors should quietly dissolve.
Where I land on this political analysis is that Tom is correctly identifying the market's relief mechanism, but he might be slightly underestimating how volatile the immediate transition period could feel. Markets do love gridlock and an unexpected sweep in either direction often forces a messy two-to-three-week repricing period where institutional desks scramble to adjust tax and regulatory models.
That said, his core thesis that the midterms serve as an expiration date for uncertainty matches historical election cycles remarkably well. Once investors know the rules of the road for the next 2 years, capital that has been parked on the sidelines almost invariably flows back into productive equities.
What makes this entire exchange between Joe and Tom so instructive is the contrast between the surface level anxiety dominating the headlines and the structural mechanics unfolding beneath the tape. While the broader public remains fixated on daily rate fluctuations, political friction, and recession warnings, the fundamental engine of corporate earnings is quietly compounding.
When you pair accelerating bottom line growth with 5% bond yields that are poised to ease, you create an environment where upside surprises become far more likely than structural breakdowns. The clear takeaway from their conversation is that sentiment and math are currently pointing in opposite directions.
The crowd is behaving as though an overextended market is teetering on the edge of a cliff, yet forward price-to-earnings multiples have quietly contracted while corporate balance sheets remain resilient. A market that refuses to break down on bad news and climbs through relentless skepticism is rarely at the end of its run.
More often than not, it is laying the groundwork for the next leg higher. As the election clearing event approaches and corporate earnings continue to hit the tape, the real question is not whether the market is overextended, but whether underinvested skeptics will be forced to chase prices higher into year-end.
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