- Tom Lee described the recent 4% equity market drop as an overreaction driven by liquidation, contrasting it with a milder response in corporate bonds, and attributed stock declines to tariff concerns while bonds anticipate a Federal Reserve rate cut.
- He speculated on a “Trump put” influencing markets, citing Trump’s Tesla comments after a 15% drop, though trade war rhetoric adds uncertainty, creating opportunities in oversold stocks.
- Lee noted markets are oversold with a potential bottom forming, viewing a 10% correction as typical but requiring recession proof to deepen, with upcoming data being critical.
Tom Lee, co-founder and head of research at Fundstrat Global Advisors, joined CNBC’s ‘Squawk on the Street’ to share his insights on the recent market movements. He described the previous day’s market activity as an indiscriminate selling day, questioning whether Tesla’s (TSLA) valuation and fundamentals truly warranted a 15% drop or if the broad market deserved a 4% decline. Lee suggested that the sell-off appeared to be driven by widespread liquidation rather than a fundamental shift, with investors reacting to the White House’s warnings of economic pain ahead. However, he noted that the equity markets experienced a sharper decline compared to corporate bonds, leading him to label the 4% drop in stocks as an overreaction.
When asked about the divergence between equities and bonds, including investment-grade and high-yield segments, Lee pointed to differing market narratives. He explained that stock markets are now taking tariffs seriously under the new administration, raising concerns about their potential duration and impact on growth, as evidenced by economists revising their forecasts downward. Meanwhile, the bond market interprets the situation as a growth scare but anticipates Federal Reserve intervention due to easing inflation pressures. Lee suggested that bonds are pricing in a “Fed put” – a belief that the Fed will step in to support markets – while equities remain uncertain about a similar backstop from the White House or the Fed.
Addressing which market signal to heed, Lee leaned toward the bond market’s view, noting that the odds of a Federal Reserve rate cut in May had risen to 54% the previous day, with expectations of three and a half cuts now exceeding the Fed’s guidance by one and a half to two and a half cuts. He also speculated on the existence of a “Trump put,” despite official denials, citing former President Donald Trump’s mention of Tesla on Truth Social after its 15% drop as a possible signal of intervention. Lee indicated that further clarity might emerge from the day’s business roundtable event, though he acknowledged Trump’s simultaneous escalation of trade war rhetoric on the same platform, complicating market reactions.
Lee emphasized that while markets had previously dismissed tariff headlines, they are now reacting strongly, yet he cautioned against taking every statement at face value, as it could paralyze markets entirely. He argued that this volatility creates opportunities, particularly for stocks that have experienced significant drawdowns, such as those down 50%. When pressed on whether Tesla’s prior half-trillion-dollar surge in two months was an overreaction to the upside, Lee introduced the concept of “rage selling,” where instant liquidity amplifies market swings. He suggested that both institutional and individual investors contribute to this whipsaw effect, leaving valuations – like Tesla’s – somewhere between their peaks and troughs.
Finally, Lee addressed the potential for a near-term market bounce amidst ongoing selling pressure from commodity trading advisors (CTAs) over the next five days. He acknowledged that positioning indicates markets are oversold, sentiment is negative, and a bottoming process may be underway, though follow-through remains critical after a failed attempt the previous week. He viewed a 10% correction as plausible, noting it would align with the sixth such drop of 8% or more since 2022—a relatively common occurrence. However, he argued that a decline exceeding 10% would require clear evidence of a recession, making upcoming economic data pivotal in determining the market’s next move.
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