Fundstrat's Lee Sees 'Excessive Pessimism'

The recent jobs report suggests that the previous August report was an outlier, indicating a softening trend in the labor market.

Fundstrat's Tom Lee stated that inflationary pressure from the labor market is likely to diminish, especially if oil prices remain controlled, preventing inflation from becoming a persistent issue. He anticipates softer inflation readings over the next six months.

Tom Lee expects bond yields to normalize as inflation uncertainty eases, which could allow the Federal Reserve to temper its hawkish stance.

Resilience in tech stocks and cryptocurrencies suggests that markets are already anticipating easier financial conditions. Prior to Jackson Hole, the 10-year yield stood at 4.75%, and any yield below 5% will likely be interpreted by markets as a positive signal for 'risk-on' sentiment.

Despite potential initial perceptions of an expensive market at the year's start, Fundstrat's Tom Lee highlighted that it has become cheaper.

Third-quarter earnings growth is projected to be nearly 30%, and earnings per share (EPS) revisions for 2027 are up over 20%, significantly outpacing the S&P's growth. The price-to-earnings (PE) multiple has also compressed since the beginning of the year.

Lee noted that high oil prices are ironically strengthening the U.S. economy due to its status as an exporter, suggesting an "excessive pessimism" in the market despite strong earnings visibility.

He anticipates a potential speed bump in markets between mid-October and the midterms, noting that current negative market sentiment makes it difficult for the market to be overextended.

Lee suggested that a Democrat-controlled Congress might be perceived by the market as 'gridlock', and that support for data centers and the Clarity Act is expected to increase after the election.