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Tom Lee, as I said, is with me now as we turn back to the markets. He is a CNBC contributor, of course, Fund Strat Global Adviserss. So, it's good to see you. Great to see you, Scott. It's been a turbulent week. It has. Is it portend something that's going to come forward here for us? Uh, well, part of it is, of course, as you know, we're in earnings season and markets tend to be volatile around earnings.
I I'd say that some of the high-profile declines like Intel look bad over a one-day period, but Intel was $17 a year ago. So, to me, it doesn't surprise me that you could see some of those uh stocks have done really well get punished a little bit on earnings. I don't I mean, this is a hard one to say it's representative of of anything.
I mean, you know, the company's obviously been challenged. They have the government backs stop in there and the stock was up a ton going into the into the print. As we turn, speaking of the print, the prints that matter next week, the mega caps, which you still love but not quite as much. Uh, I mean, we we we still like the mag 7 and the mega caps because they're great earning stories and they have a lot of visibility, but as you know, our top picks this year in terms of sector is energy and basic materials.
But as far as earning stories go, yeah, I think next week's critical cuz you got most of the mag 7 reporting. Tom, you're crushing that so far with that call. Energy and materials are the two top sectors. Why were you leaning that direction as the year began? Uh, you know, we were betting a bit of mean reversion taking place in 2026.
Uh, one of the things we identified in our 2026 outlook in early December was that energy and materials underperformed over the last five years at a level that if in the last 50 years have marked turning points higher. So, we were betting that so much of the bad news was baked in that they could have okay fundamental years, but the stocks could do really well.
I feel like you were on the right path as it pertains to small caps and the Russell just a little early. I mean, let's remind people last year you told me up here that we're going to have a 50% gain in the Russell. Um, now obviously we didn't have that, but the the Russell is almost outperforming everything else over the past year and in one month it's up 5%.
Yeah. That going to continue? Yeah. Uh, one of the things we we talked about a lot about last year was that when small caps turn, it tends to be a multi-year, in fact, it could be up to a 12-year period. So, the last turning point for small caps and on a relative price to sales last year or price to book, they were at the exact same point they were in 2001.
That was a launch point for 12 years of relative outperformance. So I think small caps benefit from a Fed turning dovish, possible M&A wave coming, an ISM turning back above 50, and then catching up to where EM because EM did really well last year, but and small caps usually track that. It didn't. Fed turning dovish, you know, we have a meeting next week in case you didn't know.
Um, and not expected to do anything. Um, so maybe not as dovish as people thought several months ago. And by the way, as we look at prediction markets, as we think about who might be the next Fed chair, Black Rockck's Rick Reer is now the leading contender in prediction markets. There's Khi. We of course have a partnership with them.
52%. Leaning towards Rick Reer. We shall see. Do you care how much you think about who the next might be? Uh, I mean, it's important because it it reflects the market. Market needs to respect who the new Fed chair is. Rick Reer is somebody that markets really do respect. So, as you know, the Fed has to communicate not only with uh the White House, but also with the bond market.
And I think Rick Reer's experience in in the markets world makes him very credible. Well, you're not expecting anything next week, right? I'm not. But I'm also expecting the Fed to reiterate that they are focused on no longer fighting inflation, but looking at the job market, that's a Fed put on the economy.
To me, that's a dovish tilt. And as long as they're not fighting inflation, to me that's a dovish Fed. And that's why do you think the equal weight S&P is up 4% so far this year compared to the S&P which is up one and the NASDAQ which is only up one and a half%. Yeah, I I think so because as you know, not only is the Fed no longer is trying to establish inflation credibility, which is hawkish, QT has ended, which to me is the same as a version of QE starting.
So we are facing a dovish Fed. Even if there aren't cuts, it's still a Fed that wants the economy to do well. I'm not sure everybody sees every appearance that you have, and people generally think you you skew bullish, which you obviously do. That said, you're still looking for what you've said could be a bare market in the middle of the year.
Do you want to explain one more time why even in the midst of this bullishness we hear from you, you still think stocks could have a bit of a rocky road at some point? Yeah, I think 2026 has the same contours as last year. Um, so in 2026, I think there's a good fundamental earning story. Earnings growth accelerating, but we have two transitions to deal with.
One is the Fed, a new Fed, the market always tests a new Fed. Um, so from confirmation, let's say that starts in March, a new Fed happens, and then the market tests him. That's one source of a draw down. The second is, of course, policy. The White House is much more deliberate this year in picking winners and losers and there's some uncertainty around the tariffs.
Last year that was enough to to drive a 20% decline in the S&P. So I think the combination of policy uncertainty along with Fed could create a draw down that feels like a bare market, but that's from higher levels as well. It make you nervous the events of earlier this week. Speaking of policy uncertainty, uh you just don't really know what what's coming uh anywhere for for that matter, social media or policy by by post or or or what have you.
What did you learn if anything about Tuesday's events and then how the market acted subsequently? Um, well, I think it's a prelude to what a bigger draw down looks like because just a social media post about Denmark caused a 2% decline in the S&P and a spike in the VIX. And that was of course quickly diffused.
But imagine a scenario where there's a series of policy headlines that markets get anxious about it. It could easily lead to a larger draw down which some expect more volatility. Let's find out what others think as well. Let's bring in Keith Lerner. He is of truest wealth and CNBC contributor Malcolm Ethridge of Capital Area Planning.
Guys, good to have you. What about that, Malcolm? More volatility ahead after this turbulent week. Yeah, I I I think we're certainly in in for some volatility, not only through the the entire year, but possibly this quarter. I don't think that uh Greenland is necessarily a settled case. I don't think that all of the the president's agenda that he's going to want to get enacted before the midterms happen.
uh I don't think we've heard the last of it and Tom makes a great point about uh years where a new Fed chair comes in and what the market's reaction is to that uh immediately following. So I think that there's definitely a ton of volatility coming. But more specifically next week I think sets the stage for some of that volatility if any of the four uh mag seven companies that we're scheduled to hear from Microsoft, Apple, Tesla, and uh uh I'm blanking on the fourth one, sorry, but that's 15% of the S&P 500s.
Apple, thank you. I don't know how I could forget them. Uh, but that's 15% of the S&P 500's waiting. And that is very important because it's going to determine whether the rotation away from tech continues or if we hear guidance from those four companies that backs up what we heard from TSMC a little bit ago that basically bookings are are sold out through the entire year.
And the money that these companies have been spending is not going to slow down anytime soon. That is very helpful for materials, construction, utilities, those kinds of names. And so I think it helps to keep the party going within tech or if we do hear some weakness in that guidance. Maybe it starts to show that more of a rotation into IWM, the small caps, things like that that Tom's getting excited about.
Isn't it interesting that you forgot to mention Apple, the stocks poised for eight straight down weeks. Uh a lot of investors have forgot about it lately because it hasn't given them Malcolm much reason to think about it. certainly, you know, relative to what their AI story has been and when you compare it to some of the other names.
Well, yeah. And it's also very telling that Apple is uh decided to I won't say throw in the towel, but go in a different direction and work with Google once again for their AI uh uh platform for their AI build into the iPhone. So, I have the iPhone 16. The 17 were also told that Apple Intelligence was supposed to be the thing to really start to turn the corner.
And it seems as if either they're delaying that or they've completely stepped away from Apple Intelligence being the thing to really power uh the device and now they're focused on partnering with names like Google and others uh to help bring that along and that's really disappointing to Apple shareholders like myself.
Keith, what's at stake do you think next week? I mean this happens at an interesting time where these stocks for a change are not leading going into their prince in many respects. Yeah, great to be with you and uh to join the discussion. So, I mean, I agree with some of the points were brought up. I mean, so far we've had this really consensus rotation into everything but tech.
Tech's down for the year, but you know, as I think about this, Scott, I think, and I zoom out a little bit. The technology sector uh was up more than 70% off the lows, and I think the last two or three months has been a consolidation. I was just looking this morning. I found it interesting that the tech sector is now trading at a premium of just 16% relative to the S&P.
That's the lowest since 2021 and it's well off the premium of about 36 or 37% that we saw just a few months ago. So we are still positive on tech. It is a critical week with sentiment now more subdued. Expectations are lower. So what we want to see is that these names clear this lowered bar as we go into you know a really jam-packed week of tech earnings.
Would you be overweight the group or would you now lean more heavily towards the rest of the market? You know, so what we've done, we're still right now, we still have a legacy overweighted tech and communications, but we were with you in mid December when we upgraded the industrial sector, the energy sector, and materials.
And our philosophy today is we still like these other areas long term, but it doesn't have to be either or. We still like them. They've been out of favor, but we still think as this more this market broadens and we have an uptick in the economy that these other areas should be able to participate. And it's going to be hard to catch all these rotations back and forth, right?
So why not have some of of both? And that's where we stand today. Tom, I mean, we're we're going to be reminded of something next week. Either reminded why we lean so heavily into these names or reminded why we've started to move in other directions in the market. Yeah. Uh, I mean, and it could be a mixed bag that I think you might have some tech names do really well because they're surprising and they're reiterating guidance and maybe there's a couple stumbles here and there, but to me it's still as a group linked to the AI trade and I think it's, you know, still a central driver of not only US but global GDP.
This sucks a lot of oxygen out of the room, guys. I I'm aware of that. But let's move to some other areas of the market that I want to get your takes on. Uh, Malcolm, gold, uh, it's just about at 5,000, silver's at 100. I mean, these are record levels for both. How do you feel about, you know, clients getting exposure there if they don't already have?
Are you a believer that the trend just continues to move higher? I do. I think that we go from 5,000 and then we start talking about when do we see 6,000? Because the angst in the markets that we're talking about, it's not going away. And it's also not going into the 10-year Treasury the way we historically would expect it to do with yields continuing to rise.
And so I think that gold more than likely continues to be the safety trade globally for investors who are either selling away from America or US investors who are also thinking maybe I ought to be looking somewhere outside of the S&P 500. Keith, what is this about this move towards 5,000 and perhaps beyond as Malcolm suggests it could go?
Yeah, I think it's a combination of things. I think today we're seeing the dollar a little bit weak. Central central banks are buying some diversification outside of the US. Um we've been bullish on gold all last year and we still are this year. I will note at least um at least on a short-term basis.
I I do think these trades are getting a little bit stretched and you know with with commodities momentum often begets momentum. So you don't want to try to call it top, but when we look we looked at silver just last week and you know the run that we've seen on a six-month basis is the most we've seen since the Hunt brothers in 79 and 80 and when we see in about five other circumstances when it's gone in this stretch and sometimes it does continue to move forward you know the next few months but when we look at 12 to 18 months the riskreward has been less favorable.
Now, obviously, the dynamics that's causing that may be a little bit different, but at this point, we're telling our clients, we still prefer uh we would prefer gold from a portfolio diversification standpoint, and we don't think the riskreward is that compelling here for silver. So, we'd be patient for a pullback, even realizing that may come from a higher level.
Tom, gold, I'll tell you what, looks a heck of a lot better right now than the alleged digital gold, Bitcoin. What's going on there? Risk, risk on, it doesn't really do anything now. Risk off, it doesn't do anything either. What's it correlated to, if anything? I think crypto has been suffering from deleveraging.
You know, in in October 10th, there was that one-time price shock that was the biggest deleveraging of crypto in history. And then this week, crypto was doing well until the Greenland announcement, which triggered the the move in JGB yields and a deleveraging of crypto. So I think crypto unfortunately is sort of would track gold but you have to subtract deleveraging and I think that's really what's been hurting crypto.
I mean people these calls that oh it's the you know the new reserve currency you know break out the gong on that that it's the new gold break out the gong on that. I mean, what have you have you rethought where you thought that this could go over over a period of time cuz your your targets on it were so unbelievably lofty and now I question as to whether they could ever be reached.
Yeah. Well, I think Davos was pretty eye opening. Uh Larry Frink talked about everything being tokenized onto a common blockchain. Um, David Saxs talks about how once the Clarity Act's passed, digital assets and basically the architecture of Wall Street are going to merge. I think crypto is still really relevant as a settlement layer, but it is more a story of smart blockchains, which is more of an Ethereum story over Bitcoin.
And as you know, Bitcoin maybe is getting dinged because there's some concerns about quantum being able to to steal or capture a third of the Bitcoin legacy wallets. Um, I don't think Bitcoin story is broken. I think it is waiting for clarity, but institutional adoption is growing. So, uh, I still don't think $200,000 Bitcoin is that crazy.
It is just a doubling in price. And think about where gold was and how silver's moved historically. Those big parabolic moves in crypto follow parabolic moves in precious metals. So, I I don't think that this is a broken story unless it doesn't happen in the next couple years. Okay. I don't sound as though your conviction is as resolute.
Well, it's those gongs, Scott. The gongs. I mean, it's the truth, though. They're still ringing in my ear. Well, yeah. You're too young for the gong show. You should go back and check it out. Yeah. We'll see. Tom, thanks. That's Tom Lee. Malcolm, thank you. Keith, you as well.
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