Tom Lee: The Market Can Climb Higher—But Expect Turbulence | #630

Episode Summary

Executive Summary: Tom Lee argued that U.S. markets remain resilient despite war, oil shocks, and negative sentiment, but warned that much good news is priced in and volatility could rise later this year around a new Fed chair and oil supply issues. He also highlighted private credit, software, AI, IPO supply, crypto tokenization, and his rule-based "Granny Shots" equity strategy as major investment themes.

Main Topics: Market resilience and the path ahead (Priority: 5/5): Lee says the S&P 500's strength reflects U.S. economic resilience and persistent weak investor conviction, but he expects turbulence later in the year as valuation expands and macro risks remain unresolved. Oil, war, and inflation risk (Priority: 5/5): He believes current oil prices may not reflect the eventual clearing price because of inventory drawdowns and global product shortages, especially outside the U.S., though the final outcome remains uncertain. Fed transition and historical volatility (Priority: 4/5): A new Fed chair creates uncertainty about how incoming inflation data will be interpreted; Lee notes that most first-year Fed-chair transitions have produced drawdowns, raising odds of a midyear correction. Credit, private credit, and software (Priority: 4/5): Lee views credit as a leading indicator for equities and thinks private credit losses may emerge but are unlikely to be systemic; he also believes software has been deeply repriced and now offers upside. Sentiment, surveys, and political bias (Priority: 4/5): He argues that mainstream sentiment surveys, especially University of Michigan data, are increasingly distorted by partisan sample composition and poor signal quality, making alternative data more useful. AI, entrepreneurship, and U.S. exceptionalism (Priority: 4/5): Lee ties U.S. market leadership to a culture of ownership and entrepreneurship, arguing AI will amplify American productivity by enabling more startups and reinvention by existing companies. Granny Shots, IPO supply, and crypto tokenization (Priority: 4/5): He explains his ETF's multi-theme stock selection process, discusses potential large IPO supply from SpaceX/OpenAI/Anthropic, and argues blockchain is becoming institutional infrastructure via tokenization and AI.

Key Arguments: The U.S. market can rally through geopolitical shocks and oil spikes because the economy has been more resilient than expected. A lot of good news is already priced into equities after the rebound from March lows, so near-term upside may be limited by valuation. Oil prices likely understate future scarcity because inventories are down and global petroleum product shortages are acute. Private credit is a real problem area, but Lee does not see it as systemically dangerous. Credit markets, especially high-yield spreads, often turn before equities and are useful for spotting market bottoms. Sentiment indicators are not signaling a market top; instead, investors remain quick to turn bearish after small drawdowns. University of Michigan sentiment and inflation surveys are increasingly unreliable due to partisan response bias and sampling issues. AI and entrepreneurship fit American strengths and should boost productivity, especially through startup formation and software reinvention. The upcoming wave of mega-IPOs could create supply pressure, but underallocated public-equity investors may absorb it. Crypto is increasingly an institutional and banking infrastructure story, with tokenization and AI-linked blockchain use cases driving adoption.

Data Points: S&P 500 level: 7,300 - Lee's initial aspirational target for the market this year, later exceeded S&P 500 year-end target: 7,700 - Lee's original projection for end of 2026 Oil price threshold discussed: $100 per barrel - Referenced as a level that would not necessarily kill the U.S. economy First-year drawdowns for new Fed chairs: 11 of 13 - Historical frequency Lee cited for new Fed chairs seeing at least a 10% decline in their first year Minimum drawdown size: 10% - Threshold used in the Fed-chair historical comparison High-yield spreads vs equities: Leading indicator - Lee says high-yield often turns before equities at bottoms Goldman prime brokerage shorting pace: Fastest in almost 15 years - Used to illustrate bearish positioning during the recent downturn University of Michigan survey sample: ~3,700 responses per month - Lee cited this as the approximate total survey sample size University of Michigan respondent split: 66% Democratic / 33% Republican - Lee says the survey's composition is politically skewed Inflation response outlier: 25% of Democratic respondents said inflation is over 100% - Example Lee gave to argue survey responses can be unreliable Granny Shots AUM: $4.4 billion - Assets in the flagship Granny Shots ETF Combined Granny AUM: $4.9 billion - Combined assets including the small/mid-cap version Granny Shots outperformance last year: +450 bps - Performance versus the S&P 500 last year Granny Shots outperformance this year: +180 bps - Performance versus the S&P 500 year to date Number of core stocks in Granny Shots: ~35 to 40 - Size of the portfolio built around multiple themes Number of structural themes used: 7 - The framework selects stocks linked to at least two of seven major themes SpaceX tradable supply after IPO: $2 trillion - Estimated amount Lee said could become freely tradable 90 days after an IPO Combined potential mega-IPO value: ~$4 trillion - Lee's rough estimate for SpaceX, OpenAI, and Anthropic together JPMorgan profit: $60 billion a year - Used to compare legacy banking profitability Jane Street profit: ~$40 billion a year - Used to illustrate scale of digitally native market-making firms Jane Street first-quarter profit: $10 billion - Cited as an example of modern financial firms' efficiency Tether profit: $15 billion a year - Used to argue stablecoin firms are becoming major financial institutions JP Morgan employees: 300,000 - Contrasted with newer digitally native firms Jane Street employees: 3,000 - Contrasted with JPMorgan's employee count Tether employees: 300 - Contrasted with its earnings power

Pivotal Quotes: "I think it really speaks to me about the resilience of the U.S. economy and maybe the continued, very weak conviction of most investors." — Tom Lee: Why stocks remain strong despite war and oil shocks "Private credit is a problem, but it's not systematic." — Tom Lee: His view of risk in credit markets "I think the current price of oil doesn't seem to reflect what will be the clearing price later this year." — Tom Lee: On oil pricing and supply shortages

Implications: Investors should expect continued U.S. equity leadership but with more volatility, especially if oil tightens further or the Fed surprises. The biggest opportunities appear in AI, software, tokenization, and selectively in credit-sensitive or underowned public equities.