Tom Lee Calls Current V-Shaped Rally the ‘Most Hated’ by Institutions

• Tom Lee sees market upside driven by potential Fed liquidity, expanding valuations due to corporate resilience through five stress tests, and possible earnings surprises from tariff adjustments.
• Despite a strong rally, investor skepticism persists with $7 trillion in cash on the sidelines, and only a fraction is needed to fuel further market gains.
• A robust jobs report and declining inflation expectations suggest the Fed may start cutting rates by September, supporting a sustained easing cycle.

Tom Lee, Fundstrat’s head of research and chief investment officer at Fundstrat Capital, joined CNBC to share his optimistic outlook on the stock market, emphasizing why the current rally has room to grow despite widespread skepticism. Lee argues that the market’s recent highs are justified, pointing to improved fundamentals and visibility compared to earlier peaks in February. He outlined three key drivers that he believes will propel markets further.

First, Lee highlighted the Federal Reserve’s potential to unlock significant liquidity. Unlike past cycles where the Fed unleashed stimulus during market lows, it has remained cautious since April. If incoming data signals a dovish shift, Lee expects 12 to 24 months of accommodative policy, which could fuel further market gains. Second, he challenged the notion that current market valuations are overstretched. Lee noted that companies have endured five major stress tests – COVID, supply chain disruptions, surging inflation, rapid Fed rate hikes, and recent economic fears – yet have emerged resilient. Without new crises on the horizon, he predicts price-to-earnings multiples will expand over the next two years. Third, Lee sees potential upside from economic adjustments around tariffs, which could lead to earnings surprises if outcomes exceed expectations.

Despite the rally, Lee emphasized that investor sentiment remains cautious, describing it as the “most hated V-shaped rally.” He pointed to $7 trillion in cash sitting on the sidelines, with institutional clients and high-net-worth investors still skeptical. While the moderator questioned the relevance of money market fund balances, noting they represent a small fraction of the $60 trillion U.S. market cap, Lee countered that only a small portion – around $200 billion – needs to flow into equities to drive a 10% market increase. He also noted that margin debt remains below October 2021 levels, signaling that leverage has not yet fueled the rally, and many institutional managers are defensively positioned, shorting the market or avoiding cyclical investments.

Commenting on the day’s jobs report, Lee suggested that a strong labor market keeps the Fed’s focus on inflation. With inflation expectations declining, he anticipates the Fed could begin cutting rates by September, initiating a sustained easing cycle. Lee also pointed out that, excluding housing, U.S. and European inflation rates are aligned at 1.9%, suggesting global monetary policy could converge, further supporting markets. For Lee, these factors – potential Fed easing, resilient corporate performance, and untapped cash reserves – point to a market with significant upside, even as skepticism persists.

WallStreetPit does not provide investment advice. All rights reserved.

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