Tom Lee, co-founder and managing partner at Fundstrat Global Advisors, appeared on CNBC’s ‘Squawk on the Street’ to offer insights into the latest market trends and his outlook for 2025. With the Santa Claus rally having kicked off, Lee expressed optimism about the continuation of market gains into the new year, citing several tailwinds. He noted that the Federal Reserve’s focus on inflation has subsided, the U.S. election is now behind us, and there’s a significant amount of cash on the sidelines, fostering a more vibrant market environment. Lee emphasized that the return of “animal spirits” among companies, leading to increased mergers and capital market activities, would further propel stock performance.
Addressing concerns about high Treasury yields and a strong dollar, which have historically been headwinds for stocks, Lee argued that even with yields at around 5%, they aren’t significantly damaging to the market. He pondered whether the rise in yields was due to inflation, a robust economy, or concerns over the incoming administration’s policies like tariffs, but he remains confident that these factors won’t derail market progress in 2025.
Lee also discussed the global economic landscape, highlighting the U.S.’s dominant position in technology, healthcare, and financial sectors, which have been the strongest industries globally. He suggested that while the U.S. would continue to lead in a tech-driven market, a resurgence in industrials could see Europe and Asia potentially outperforming if that sector rebounds.
On the topic of valuations, particularly for stocks that have seen dramatic rises, Lee acknowledged that valuations could become a liability if the market can’t sustain surprises or if it has overpaid for future growth. However, he views the current valuation as not yet indicative of a bubble, arguing that investors have been underpaying for technological innovation. He foresees 2025 as a year where AI and similar technologies will significantly alter business practices in America, potentially justifying these valuations.
Regarding small caps, despite their underperformance in December and skepticism about their recovery, Lee remains optimistic. He pointed out that small caps are trading at low forward P/E ratios and are likely to benefit from factors like deregulation and economic cycles. He highlighted the historical data showing that after periods of significant underperformance, small caps tend to rebound, suggesting that the current skepticism could lead to substantial gains in the coming years.
Lee’s analysis combines a blend of economic indicators, policy changes, and market sentiment, offering a cautiously optimistic view for both the broader market and specific sectors like small caps, underpinned by a belief in continued technological innovation and economic recovery.
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