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

CNBC Television

27 Jun 202405:13

Summary

TLDRTom 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.

Outlines

00:00

📉 Tom Lee's Market Outlook and Inflation Insights

Fundstrat Global Adviser's Co-founder and Head of Research, Tom Lee, discusses the S&P 500's year-end targets and the current market fundamentals. He initially predicted a 5200 target for the S&P in early December of the previous year, but with inflation showing signs of decline and more than half of its components returning to pre-pandemic levels, he suggests that multiples could expand, making the 5200 target too conservative. Lee believes that the war on inflation is progressing positively, and he anticipates a significant fall in inflation rates, which could lead to a reevaluation of the year-end targets in the coming weeks. He also touches on the potential for deflation in the used car market, as prices continue to fall, and the impact of this on both consumers and the broader economy.

05:02

🚗 Market Dynamics and Investor Sentiment Comparisons

The script continues with Tom Lee's analysis of market dynamics, particularly focusing on the used car market and its potential for deflation. He notes that with nearly 290 million cars on the road, even a 10% drop in used car prices represents a significant amount of disinflation. This could be painful for those who borrowed to purchase cars but beneficial for new buyers. Lee also addresses the broader implications for earnings estimates in an environment where inflation is falling and the Federal Reserve may start cutting rates. He points out that while there will be winners and losers, sectors like technology are less correlated with inflation, whereas basic materials and energy are more so. Lee concludes by comparing current market sentiment with the late 1990s, noting that there is more skepticism today and a greater number of 'top callers,' suggesting that investors should be prepared with appropriate portfolios and patient with value investments.

Mindmap

Keywords

💡Fundstrat Global Adviser

Fundstrat Global Adviser is a financial services firm that provides research, analysis, and advice to institutional investors. In the video, Tom Lee, the co-founder and head of research at Fundstrat, discusses his insights on the market, indicating the company's role in shaping market perspectives.

💡Year-end targets

Year-end targets refer to the projected goals or expectations for a particular financial metric, such as the S&P 500 index level, by the end of the year. Tom Lee mentions reviewing these targets in light of recent market movements and economic data.

💡S&P 5200

S&P 5200 is a specific target level for the S&P 500 index that was predicted by Tom Lee's team in early December of the previous year. It represents a significant increase and is used in the script to illustrate the potential growth of the market.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the script, Tom Lee discusses the progress in the 'war on inflation' and how recent reports suggest a significant decrease in inflation components, which is a key economic indicator.

💡Multiples

In finance, multiples refer to the ratio of a company's share price to its earnings per share (P/E ratio) or other financial metrics. Tom Lee suggests that the market's multiples can expand, indicating his belief that stock prices may increase relative to their earnings.

💡Deflation

Deflation is the opposite of inflation, where there is a decrease in the general price level of goods and services. The script discusses the potential for deflation in the used car market, which would be a significant economic shift.

💡Earnings estimates

Earnings estimates are predictions of a company's future earnings, which can influence stock prices. The script raises the question of how changes in inflation and interest rates might affect these estimates and, consequently, the market.

💡Winners and losers

In the context of the video, 'winners and losers' refers to companies that will either benefit or suffer from changes in economic conditions. Tom Lee notes that not all sectors are equally affected by inflation, implying that some companies may outperform others.

💡Wage pressures

Wage pressures refer to the increasing costs of labor for companies, which can affect their profit margins. The script suggests that wage pressures are cooling, which could be positive for companies as it might ease the pressure on their earnings.

💡Consumer wallets

Consumer wallets represent the spending power of consumers. In the script, Tom Lee mentions that falling gasoline prices are helping consumer wallets, suggesting that lower energy costs can increase disposable income for consumers, potentially boosting the economy.

💡Multiple expansion

Multiple expansion occurs when the market value of a stock or the entire market increases faster than its earnings, leading to a higher price-to-earnings ratio. Tom Lee discusses the potential for multiple expansion due to improved earnings relative to expectations.

💡Breadth

In financial markets, breadth refers to the number of stocks participating in a market trend. The script mentions a divergence between the S&P headline index and breadth, indicating that while the index may be performing well, not all stocks are participating in the uptrend.

Highlights

Fundstrat Global Adviser's Co-founder and Head of Research, Tom Lee, discusses the S&P 5500 target and its reflection on the year's end.

Tom Lee's initial projection of S&P reaching 5200 in 2024, which was almost a 20% gain at the time of prediction.

The market has moved well above the initial projection, and the fundamental picture is closer to Lee's expectations.

Lee's view on the progress of the war on inflation and the significance of the last two inflation reports.

55% of inflation components are back to pre-pandemic levels, suggesting a significant fall in inflation.

Factors contributing to the expansion of multiples and the reconsideration of the year-end target above 5500.

The use of a 'falling rock' graphic to describe the expected drop in inflation elements.

Tom Lee's forecast on new and used car prices and the potential for deflation in this sector.

The impact of used car price falls on the amount of disinflation and its implications for consumers.

Inventory levels for new cars and the potential short-term disruption due to the CD K cybersecurity hack.

The discussion on earnings estimates in an environment of falling inflation and potential Federal Reserve rate cuts.

The complexity of earnings picture with winners and losers in different sectors, such as technology and basic materials.

Lee's outlook on global economy improvement and earnings delivery suggesting a higher S&P target for 2025.

The question of multiple expansion in the context of current forward earnings and the composition of gains.

The difference between the S&P forward earnings multiple and the median P/E, indicating potential for re-rating.

Tom Lee's comments on the S&P headline index and breadth divergence over five days, a streak not seen since the late '90s.

The comparison to the late '90s and the implications for investors, including the need for portfolio adjustments.