Inflation is going to fall like a rock, says Fundstrat's Tom Lee

Summary

Tom Lee, Fundstrat Global Adviser's Co-Founder and Head of Research, discusses the S&P 500's performance, suggesting that inflation is set to fall significantly due to recent progress and a majority of its components returning to pre-pandemic levels. He anticipates a potential deflation in the car market, with both new and used car prices declining. Lee also addresses the impact of inflation on earnings estimates, noting that while some sectors are unaffected, others are highly correlated. He believes that wage pressures are easing and consumer wallets are benefiting from gasoline price reductions. Lee cautions investors to be prepared for market conditions that may resemble the late '90s, emphasizing the importance of patience with value investments and readiness to exit high-momentum stocks.

Takeaways

• 📈 Tom Lee, the Co-founder and Head of Research at Fundstrat Global Adviser, suggests that the S&P 500 could potentially exceed the previously set target of 5200 for the year.
• 📉 He indicates that the progress in the 'war on inflation' has been better than expected, with 55% of inflation components returning to pre-pandemic levels, signaling a significant drop in inflation.
• 💡 Tom Lee believes that the falling inflation will allow for multiples to expand, suggesting that the year-end target of 5200 might be too conservative.
• 🚗 He forecasts potential deflation in the used and new car markets, with used car prices continuing to fall, which could be both a boon for buyers and a challenge for those who financed their purchases.
• 🔑 The discussion highlights that while overall inflation is expected to trend towards 2%, there will still be companies that are not directly affected by inflation, such as those in the technology sector.
• 💼 Earnings estimates are complex, with some sectors like basic materials and energy being highly correlated with inflation, while others like technology are not.
• 📊 Tom Lee predicts that if the global economy picks up, earnings for 2025 could be closer to 280, an improvement from the current suggestion of 270.
• 📊 The forward earnings multiple for the S&P is high at 21 times, but the median is lower at 16, indicating that there is potential for some stocks to rerate upwards.
• 📊 Tom Lee points out that the divergence between the S&P headline index and breadth is a rare occurrence, last seen in the late '90s, and could be a cause for concern.
• 🚨 He advises investors to prepare their portfolios appropriately, suggesting that the current market skepticism contrasts with the exuberance of the '90s, and that caution may be warranted.

Q & A

What was the initial year-end target for the S&P 500 set by Tom Lee and his team in early December last year?

The initial year-end target for the S&P 500 set by Tom Lee and his team was 5200, which at the time was almost a 20% gain.

What has changed in the market since the initial target was set, according to Tom Lee?

Since the initial target was set, the market has moved well above the target, and the fundamental picture looks closer to Tom Lee's expectations due to better progress in the war on inflation.

What does Tom Lee believe about the current state of inflation and its future trajectory?

Tom Lee believes that inflation is going to fall significantly, as the last two inflation reports and 55% of inflation components are back to pre-pandemic levels.

How does Tom Lee view the potential for multiple expansion in the market?

Tom Lee believes that multiples can expand because of the factors that give comfort, such as the falling inflation, which he thinks will allow the S&P 500 to go higher than the initial target of 5200.

What is Tom Lee's stance on the deflationary impact of used car prices falling?

Tom Lee sees the falling used car prices as a meaningful amount of disinflation, which could be painful for those who borrowed money to buy cars but is also saving people who are buying cars.

How does Tom Lee think the trend for new car prices will evolve, considering the CD K cybersecurity hack?

Tom Lee believes that the trend for new car prices is lower, but the CD K cybersecurity hack might disrupt it in the short term due to a shortage of new cars available.

What is Tom Lee's perspective on earnings estimates in an environment where inflation falls and the Fed starts cutting rates?

Tom Lee acknowledges that there will be winners and losers, but he believes that the biggest pressure on many companies' margins, such as wage pressures, is cooling, which is helping consumer wallets.

How does Tom Lee expect earnings to evolve if the global economy is picking up?

Tom Lee expects earnings to be closer to 280 for the next year if the global economy is picking up, as earnings delivered have already suggested 270 for 2025.

What does Tom Lee think about the potential for multiple expansion given the current forward earnings multiple?

Tom Lee believes that there will be more potential for multiple expansion in stocks with a median P/E of 16 going to 20, rather than those at 27 going to 28.

What historical comparison does Tom Lee make regarding the current market conditions and the late 1990s?

Tom Lee compares the current market conditions to the late 1990s, noting that if it does look like the late '90s, investors should prepare their portfolios accordingly, being patient with value and ready to exit high momentum.

How does Tom Lee perceive the level of skepticism in the market today compared to the 1990s?

Tom Lee perceives that there is more skepticism in the market today compared to the 1990s, when there was more exuberance and fewer people who thought stocks could ever go down.