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Now that Nvidia earnings are out of the way, is the AI trade about to take its next leg higher? Let's ask Tom Lee, he's Fundstrat's head of research. Welcome back. So, so how do you assess this now? We've We've cleared the way, right? All the AI stuff's now out of the way. We're looking at yields, we're looking at oil, we're looking at the Middle East, but how do you feel about this market when you just heard Chris Harvey at the top of our show saying we're going to have an everything rally that's going to take us past 8,000 by the end of the year.
Yeah, Scott, um yeah, I I think the market is pretty healthy. Um it showed resilience in the face of higher oil, higher yields. But I also think the US is pretty unique because we do have a structural driver for the economy, which is not only is the US the producer of AI, but we are also uh relatively energy independent, and that's been exposed by this war.
And the consumer's in pretty good shape. So, I mean I I I think there is a pretty good runway. So, I'd agree with the idea that stocks, compared to the start of this year, have more upside into year end. We've got a few things we have to work through as we get later through the year, but I think for now the fundamentals are healthy and that's supported by earnings.
I don't know I don't know what shape the consumer's in to be honest with you. I mean I understand the K-shaped economy, obviously. Top of the K is better than the bottom of the K in terms of their durability to keep spending. But you listen to Walmart, which was pretty cautious, and you're like, what is the real state of the consumer?
And if oil prices remain elevated for too long, is that the thing that wrecks the story? Uh Scott, yeah, it is in this in a way it is K-shaped because if I had to say, "Okay, what are the things that are sort of balance and things moving the consumer?" Of course, we know that it's higher gasoline, higher food, and of course there's going to be a a shortage of some petroleum products.
But on the other end of that spectrum is, you know, the wealth that's going to be created by the IPO SpaceX, OpenAI, etc. I mean, that's several trillion dollars worth. And as we know, there's like a marginal propensity to consume from the wealth effect. So, I think the consumer is getting a tailwind later this year, but a lot of it is if for those who own equity.
I mean, a tailwind from that from owning the IPOs? Well, the it's actually the in private investors. As we know, SpaceX was probably seated at, you know, $50 million. It probably raised, you know, tens of billions over the last uh decade. But now it's going to have a a net worth valuation of around 1.7 trillion.
So, that that's actually now going to be monetized uh for the LPs of the funds that invested in SpaceX. So, there you know, several trillion dollars is is quite a lot of stimulus to the economy. Wow. Okay. Uh Hampton's real estate market, watch out. Uh AI trade, how how do you feel about it after Nvidia?
Uh I mean, a company with the the size of revenues in video growing at 100% um I think it shows that there is still uh you know, unrelenting demand for for the product Nvidia sells. And then we know that those who are starting to use AI are actually noticing a gain of function on productivity. You know, Ken Griffin really stated it well when he says he could see this replacing a lot of analysts.
So, to me, I think not only are the users of AI benefiting, but there's still a shortage of those who are supplying the equipment. But aren't you still calling for a pullback in stocks and something meaningful? Like the one we had already didn't really qualify, if you will, under what you were thinking could happen, right?
That's right, Scott. I think we had uh like what Ed Yardeni would call a rolling bear market in things like Mag 7. And of course, last year in energy, but in software, etc. But I think later this year the market is going to confront a few things. You know, one of course is just your typical midterm seasonality, you know, the uncertainty into that.
The second is that there is a a a day of reckoning coming because the inventory of petroleum products is short and not being alleviated anytime soon. And the third is uh we probably have a some concerns later as the as these IPOs come, SpaceX, OpenAI, etc. that there's a lockup expiration later. So, I I think that's a supply overhang.
So, I think that dynamic comes to play later this year, but in the meantime, I think investors are focusing on AI fundamentals and you know, there's a real shortage and and stocks that are working are the ones that are selling something that scares. Tom, I I want to make sure I heard you right. Are you calling for a rolling bear market in Mag 7 names cuz is that what you're looking for?
You you look for these stocks to become weaker at some point and dramatically so at some point this year? Is that Is that what I heard you say? No, to clarify, I think that I think we've already had a bear market in Mag 7 and software. I think there is going to be a bear market in other stocks later this year, yes.
Um but I think it's going to spare the Mag 7 and and software. So, it's going to be names that either got lofty or are going to be affected by the fact that there is a lot of supply of new stock later this year or the companies that are going to get hit by the shortage in petroleum products. So, I think there's reasons that we could have headwinds later this year.
Are you talking about like semiconductor stocks? Yeah, semis may become a bubble. They're They to me they don't seem like a bubble yet. You know, when Nvidia is trading at 19 times earnings, I think it's still a good risk reward. Um but I think that there are parts of that ecosystem that have become quite expensive.
If you found value in this breakdown, please hit the like button, subscribe, and share it with other investors who are paying attention. We're here to keep bringing you sharp analysis and voices that understand what's unfolding. Thanks for watching. Joining us now Tom Lee, CIO and head of research at Fundstrat Fundstrat.
Tom, good morning. You know, we were just saying how this this market has done a very good job of kind of shaking off or or looking beyond the geopolitical situation over the last four or five weeks. Really following the script as you've pointed out of other geopolitical conflicts in the past where you know, markets bottom well before things are fully resolved.
But how do you view things right now after this nice winning streak in the market and the and the reliance on mag seven and semiconductors to to get us here? Uh, you know, I think a risk reward for stocks is still pretty good. Um, I know the war remains uncertain. But I think the war has also exposed the strength of the US relative global position.
You know, earnings estimates have actually gone up um as earning seasons progressed. The US is a a leader on AI and that productivity lift is is meaningful. I think it's really one of the drivers for not only GDP, but one of the reasons US companies have been resilient. And I know there's a lot of investors still on the sidelines.
So I I think the war remains uncertain and I mean, it certainly looks like it's going to be a longer war, but I do think stocks actually still have some tailwinds actually as we get through May and into July. You mentioned the earnings estimates going up. Undoubtedly the case. Although there again, it it's been pretty concentrated in the AI theme and in in in semiconductors and the other cap ex beneficiaries.
So therefore the market is somewhat narrowed out to that very dominant theme. I'm looking I always keep an eye on the consumer discretionary equal weighted. It's 9% below its highs, right? So that's sort of where some of the economic frictions from the war can bite. This So, is that okay? Is that a good formula for for how this market can can continue toward your your your targets higher?
Uh I mean, I think one of the reasons why uh it does feel concentrated is the AI story, which is a global productivity story, right? There AI is essentially creating productive units uh that actually either help workers uh produce more or even replace workers in some countries. It's primarily taking place in just the US and China.
And so, I'm not surprised in a way that we could see the US companies actually disproportionately benefiting this because it's not really taking place in Europe. So, I I'd sort of expect that concentration, but um you know, as far as like the effects later this year from higher oil, I you know, I think that's a negative consequence and I think it raises questions about what the what the Fed could do.
In fact, of course, we're getting a new Fed chair. That's why I think later this year the markets could actually face a test around that, but for now I think it's just an earnings tailwind story. And actually, you like us software, Tom. On Friday, you you named it a top sector pick. Was there anything from earning season, maybe from Microsoft's report at last semi their numbers software companies that have reported?
Anything that you heard specifically that made you feel better about the sector? Well, I think one of the things that apparent to us around software is I know that investors are correctly thinking that there is that they should question, you know, the durability of these software models over time. But many of these companies are are very well managed and companies will adapt.
So, it's become a a sort of a de-rating story where investors are questioning future earnings, but now I think the risk reward is is pretty favorable. So, I think for for the right companies and for the best businesses, this is a great risk reward. Hey Tom, just uh watching the headlines that we just got, you know, stock futures jumping on this news that we got again from an Iranian news agency that two missiles struck a ship, a US ship in the Gulf.
What What do you do with that? I mean, obviously, we're still trying to react pretty quickly with this, but the futures sold off sharply on this. Dow futures down by 375 points, the S&P futures off by 40. How do you take these headlines? Uh I mean, I'm not surprised in the short term markets are going to react on a risk-off way.
Uh it makes a lot of sense because this adds to the fog of war. But at the, you know, as if we take a sort of step back further, um I think we're all settling in for the idea that this is this is going to be a longer war. I I know it's going to have some effects on oil prices and one of the things we've been writing about to our clients is really just puzzling over the fact that there's a price for oil today in the futures markets, but it doesn't seem to reflect the reality of there's, you know, acute shortages developing and eventually price has to react.
So, uh for now, it's it's been pretty remarkable to me that the the market's been able to see through that and I it's one of the reasons our base case is for markets to make it to the S&P to 7300. But I do think at some point there could be a reckoning later this year and I think part of it is is the the Fed being tested, a new Fed, and the second part is, you know, the market trying to reconcile this shortage of oil and the fact that futures prices haven't really reflected that shortage.
Yeah, I mean, I know you've been, Tom, on that idea that there might be a larger-than-normal, so to speak, correction at some point hitting later this year. Also interested to say you think that, you know, some investors are still kind of off-sides and under invested after to rally we've gotten back to all-time highs, and that specifically retail investors seem as if they were kind of you know, wrong-footed by this move, which is goes in line with what I've been watching as well.
I kind of got shaken out near the lows, and the news kept them out. So, where does that stand? Uh you know, I think it we're still when we look at investor positioning 2026 is unusual because in past corrections retail investors were the steady buyers, but this year it looked like they were selling into the lows.
There's still a lot of cash on the sidelines. Sentiment's still really muted. And in our conversations and surveys with clients, we could still see that cautious positioning. So, I do think that today's pullback is going to eventually be bought because again the under sort of the underlying structure of the market is a good earnings visibility story with AI, and of course demand for AI picks up if energy prices and other pressures are causing corporate margins to be under pressure.
So, I I think investors are going to buy this dip. Tom, good to talk to you. Catch you up with you again soon. Thank you. If you found value in this breakdown, please hit the like button, subscribe, and share it with other investors who are paying attention. We're here to keep bringing you sharp analysis and voices that understand what's unfolding. Thanks for watching.
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