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those Industrials they're also in the green there's a lot of green as you can see on the board today takes us to our talk to the tape this Tech takeoff and why some make the argument that it is not done just yet that is the view of Tom Lee funstrat's co-founder and head of research he is as you can see with us live welcome back it's good to see you again great to see you Scott doesn't want us doesn't want to let up it certainly doesn't seem like it wants to why do you think it can continue Tom markets climb a wall of worry and we know that there's a lot of things that we visibly worry about including debt ceiling inflation the FED Regional Banks but I think the message that's come out in the last couple of months is companies have been incredibly resilient you know they manage costs really carefully they've been selective in how they manage prices they've been really good at targeting customers and I think that's what's paying off you know they had a great first quarter earnings season and as you know at some of these conferences they haven't been cutting guidance in fact I think they've de-stocked so I think they're still upside to earnings that's one positive story and the second of course is positioning because people really did rage sell last year but we know that the bond market is sort of signaling a softer Landing than many were expecting I think that's positive for equities so you think there's still going to be a Chase to come at least as it relates to Tech because you've gotten a Year's worth of gains in these stocks and in some cases you've gotten like five years worth of game gains it's been quite remarkable and and you know exactly what I'm alluding to the the fact that Nvidia and stocks like that up 100 year-to-date plus and don't seem to want to let up yeah uh I mean I think what's interesting about Nvidia is that it this was not a widely shorted stock into the results so that 30 rally was really the market recognizing they have to reprice the Future cash flows I think that's pretty true for most of the Fang trade you know one of the reasons we thought it would be our top sector pick this year was that all this wage inflation and need to boost productivity was going to be solved by these fan companies and that ultimately translates into better than expected growth I think that's really the thesis and it sort of explains why paying you know has has really LED this year but I I don't find them actually expensive stocks wow the Divergence though between you know Fang and some of the others in the rest of the market doesn't concern you I've cited some of the numbers that are out you've seen them yourself I'm sure bespoke the three-month performance spread between the s p and the equal weight s p the widest it's been since December of 99 we all know what happened in 2000 and the point that is you know the intent event of this data Tom it doesn't make you a little nervous oh it does Scott because you know Market breadth is important to confirm a trend but but I also think it's it's explainable I think there are some binary events that naturally would make people cautious like this debt ceiling uh it's hard to say how do you find equilibrium price today one thing that we pointed out to our clients this morning was that when you look at Industrials and consumer discretionary there's actually quite a lot of good Market breath well above the s p overall and Tech expanding and even Healthcare so I think routes actually have more performance underneath than as visible I think a lot of people started too Clips saying it's it's just Fang and nothing else there's roughly 200 stocks outside of bank that are outperforming this year that's actually not bad I know but it but how long can it can it truly last if it remains as top heavy as it is despite the fact that sure there may be some other stocks performing but if you strip out you know let's say the 10 biggest names the rest of the Market's up like four percent collectively that's right our team's been looking pretty carefully at what we call gex level two um you know so that the groups beneath uh the 10 sectors and there's there's a bunch of groups that look like they're about to break out including the banks so I think one of the groups to watch is the Industrials and the banks because if they start to react positively to some resolution on the debt ceiling and we know there's a temporary foot that put helping the regional Banks you know that's another 40 participation in the equity market so I think there's a lot of things that could go right although I I'd agree the breadth hasn't been great yeah but I mean that this tactical overweight that you have on the kre you know the regional Banks why why urge people to take what I think fairly some would suggest would be outsized risk just given what's happened in the space and the idea that commercial real estate may still have a shoe or two to drop and it would be felt perhaps most acutely there uh that's right Scott it's a it's a tactical bet we're making uh we we there's a lot of conditions that would negate that call but our our take at the time is governments and communities really do value their Regional Banks and so the slippage that you lose from deposits not paying Market rates is going to diminish I think a loan to value isn't as egregious on Commercial Real Estate uh as the last full weight cycle in other words uh I think that there can be quite a big impairment on commercial real estate prices and you don't have realized losses and if that's the case then these Regional banks are going to sort of come back from the low basement valuation so I think that if that means they can rise 20 or 30 from here it's still worth a tactical bet because we don't think they're going to zero well what about the the FED Tom I mean every fed member seemingly was come on this network within the last seven to ten days suggests it's foolhardy to think that you know we may be fully done sure we may pause in June but don't write future hikes off the table it's sort of the message that Mester Loretta Mester gave today on this network and there's been a drum beat really of that oh you're right Scott I I don't want to fight this bad in the sense that the FED is concerned about inflation and and they have to talk tough but at the same time there are emerging signs coming from the bond market that say that forward-looking data is supporting a Fed that could afford to become a little more damage I think today's pce supports that we sent out an alert to our clients I think three things with them that really told us that future inflation is coming down one of them being that the three biggest contributors to core pce more than two-thirds of that rise was housing Financial Services which is because of higher interest rates and used car prices I don't think those are really inflationary drivers from the fed's lens and we also saw the um uh year ahead inflation come down but actually it sort of reversed a lot of that surge last month so I agree Scott I don't want to fight the FED but I think the Bond Market is saying the FED might be able to stop looking at backwards data and start to look at market-based data I know but the but the bond market it seems has come more in alignment with the FED in in recent days and it feels like you still are fighting the FED at least in some respects even though you suggest you don't want to because at minimum it feels like they they may not hike anymore but they're they're going to remain high for a reasonably you know what they suggest would be a long period of time the effects of that may not fully be known or felt to this point so aren't you in effect fighting the FED with a Target year end of 47.50 that's a long way to go from the 42 10 that I see right now by the way stocks at the highs of the day uh yeah Scott a couple of things I think Nvidia tells us what stocks can do that aren't heavily shorted Nvidia didn't have a short position but still did what looks like a sky needle move um I think a Fed staying at five percent for two years is tight but it's not an equity killer because I think the tenure is still going to see it at three and a half or four that's really the since 1930 that's one of the highest realized peas take place is between three and a half and a five and a half percent tenure yield so I know it sounds like I'm fighting uh especially 2022 Market narratives but if you look at a 90-year market narrative 10-year pinned at three and a half to 500 it's actually a 28e and I think it it gives us sort of the option value of inflation coming in softer I I think the thing we don't know is there's no tiebreaker yet that inflation's cooling but I think today's PC data kind of tells us it could it could drop sharply over the summer I mean it just feels like it's pretty sticky if if nothing else and and the calls that you've had of late and let's say the last few months that inflation was going to fall much further it was falling and it was going to continue to fall much further uh maybe somewhat suspect by the fact that it it looks a little stickier I think is fair to say than maybe some had suggested but let's do this let's welcome in Cameron Dawson CIO at New Edge wealth and continue our conversation it's nice to see you um what do you make of of what Tom has suggested well I think that if we were to get to 47.50 we would be trading at 19 and a half times 2024 earnings at 243 dollars a share that is very expensive by historical standards and the only times that we've traded up to those levels if you're looking on a forward basis not a current year basis but forward basis is during bubbles meaning the tech bubble and during the covid bubble and the covet bubble was supported by incredible stimulus to this Market meaning money supply growing 30 percent real interest rates negative one percent and so if we look at where there could be risk if we trade up to those levels but you don't have fed support you're really in a whole new world of territory where we simply would be trading at unprecedented valuations Tom how do you respond well as you know they say a bubble is when your neighbor owns a stock that's making money and what I mean by that is I don't think the s p is that expensive when you exclude paying it's trading at roughly 15 times forward earnings and in fact the two most expensive sectors outside of bang our health care and utilities and Staples so the question is that if you're worried about valuation I'd argue there's evaluation bubble in defensive stocks in the same way that there's a bubble in Money Market cash balances households are sitting on more cash than any time since even the pandemic in fact if you look at margin debt as a percentage of the s p it's down to 1.4 percent that's that's the internet.com bubble low there's been a huge deleveraging out of equity so I think if we let price discover the stock market is saying that most stocks are at 14 15 p e that's not expensive to get to 47.50 for the rest of the market that's getting towards a 16 multiple I don't think that's bubble territory I mean the other part of what Tom has suggested is you know even though you've had pretty hawkish that speak is don't so much listen to that listen to what the bond market is saying and even though as I suggested to Tom the bond markets Come a Little Closer of late to the fed that's the place that you should look inflation is going to come down faster than people think the fed's not going to have to do what it says and the bond markets forecasting that pricing in the pivot and expecting that to come where the bond market essentially bends the FED to its will and gets it to price and easier policy has been the Widowmaker trade since the beginning of this tightening cycle and we're seeing it today where now there's over a 60 chance of a hike in June just a few weeks ago that was zero and so I don't think that the FED is done which means that there's still potential for Upward pressure on interest rates and right now we're in this suspension of disbelief where interest rates apparently do not matter for the equity Market we've had periods like this they haven't necessarily lasted for long so either the equity Market is expensive given the current interest rate backdrop or interest rates will fall because the bond market is now pricing in a too tight policy path we think it's likely more the former where interest rates are reflective of the real reality of this economy because it is pretty remarkable Tom isn't it that the stock market at least has sort of looked the other way as I'm asking you this question I said we're at the highs of the day we're you know 42-10 on the S P greater than 340 on the Dow interest rates have crept up seemingly almost every day and the stock market is kind of turning a blind eye to it Scott I I actually understand that narrative and I I think it even if it dovetails with someone saying the bond market isn't necessarily saying there's a soft Landing maybe even a hard Landing because if the fed's serious and we have an inverted curve that's hard landed but when I look at the market and and we know that much of this Advance has been driven by Fang which is solving inflation I don't want to be sort of throwing out uh speculation but you know one thing we have to keep in mind is that we're already seeing companies slow hiring plans because of the potential benefits from Ai and machine learning that's exactly the dynamic that volca was trying to achieve when he was trying to push wage pressures down so I think there's mechanisms underway that explain why Fang is leading and the rest of the stock market therefore can kind of come into line One Direction or the other if it's a soft Landing there's gonna be a huge expansion to Market correct that's why I think Industrials and financials are trying to even the Autos are starting to sort of push above their 208 and 20-day moving averages you know basically enter a boat trend but yes we haven't had a tiebreaker moment but I think that there's too many people in the camp that this is a hard landing and they're trying to argue that the stock market is irrational but at the end of the day uh you know the Fang move was actually it's really a thematic trade that's been built around Ai and Automation and you're seeing the numbers from the companies delivered I mean Nvidia shows that it's not a bubble it's actually real growth I mean you are kind of one of these people right that Tom's referring to hard Landing recession probably inevitable and the stock market valuation now relative to your view is irrational to use Tom's word well our call has been that a recession would come later than people expected and that growth likely will hold up better than expected and that's what we have seen to begin this year and I think where we have been wrong or where we've seen the market move against us is that we did expect better data which means tighter fed which in the past has meant lower valuations mostly for growth in tech stocks and that simply hasn't happened this year it could just be because of AI and because of the prospect of that e exploding to the upside pricing in that future potential it could also be because of liquidity we know liquidity has been a Tailwind because of the spending down of the treasury cash balance there has been liquidity added to this market and that typically is very supportive of growth and Tech valuations and so it's a question on the other side of the debt ceiling as that liquidity Fades does that become an issue for these valuations Tom have you have you have any sympathy at all for those who suggest that we were we were saying the same types of things in in using the same justifications in 1999 and saying well you know that then it was eyeballs and it was total addressable market and here we are talking about the potential total addressable market for AI to justify a move that Nvidia has has had this week or a Marvel which has had an even greater week than Nvidia and sort of got lost in the AI Shuffle if you will but how do you respond to those who who say you know this is the same kind of stuff I heard in 1999 and we all know how that story ended uh Scott I think it's it's a good question to ask uh I was a technology analyst in 99 working at JP Morgan covering a sector that had very high valuations Wireless that Market meant that when I told an animal uh our sales Source I had a buy rating on a stock and the upside was only 20 over the next 12 months they said Tom that's a neutral why are you wasting our time there was a change in Market expectations at the time that you could make 20 in stocks you know we today the opposite environment exists six strategists on the sell side change their price target for the s p this year four of them were price Target raises interestingly four of the six are still ten percent below where the s p is today the strategists have become a little more bullish but they still think we're going to fall off a clip I don't think any investor I meet is actually constructive uh I was fortunate to meet many uh investors and companies over the past few weeks including uh at The Summit CNBC Summit and I found a huge Divergence between how investors think we're already in a recession and companies that are managing through this really well saying they prepared for a recession last year they either cut capex cut inventory or slowed hiring and that recession is not happening they have to start going into early psycho mode and expanding because they've really been on a huge strict diet for the last 18 months I know you fancy yourself a market historian too and I know you're well versed on on the history of the market now how do you think about that question to Tom his answer relative to 99 and now I think that we're probably earlier innings in this whole part benign maybe we're a few years but before that meaning that we are seeing the earnings deliver and you're not at the point where all the Tide Is Lifting any boat that has anything to do with AI or not even close to AI so the thing with bubbles to remember is that they can last a lot longer and they can get a lot sillier before they end but it's always important to remember that on the other side of a bubble there's typically a crash so the biggest discipline is to always gut check and say am I pricing in the entirety of the future growth into today's valuation and with Nvidia it's actually trading at a lower evaluation today than it was two days ago that's exactly right that's exactly because of the the earnings because the E yep um it just reminds me you know it was Jim Breyer out at the conference that Tom was at that we just had our CEO Summit our inaugural one out in California where he suggested this was 95 that this was the very early days of the internet internet and again we know how it ended doesn't mean this is going to be um synchronous with that but we'll see Tom thanks so much that's Tommy hi joining us today Cameron yep yeah enjoy the long weekend uh and you as well we'll see you soon that's Cameron Dawson
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