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- Mega-cap tech stocks can continue their rise even amid rising interest rates, Fundstrat’s Tom Lee admitted CNBC on Friday.
- That line of thinking is contrarian to the often impulse sell-off seen in tech stocks whenever percentage rates move higher.
- Lee also thinks investors can rest easy as he doesn’t see runaway inflation unfolding in the US.
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Two of the biggest stock market risks worrying investors advantageous now don’t concern Fundstrat’s Tom Lee, according to a Friday interview with CNBC.
Inflation has been on the rise amid supply-chain disruptions from the COVID-19 pandemic and augmenting wage pressures. Core inflation rose 3.6% in August, representing the biggest year-over-year jump in more than 30 years.
That’s unequalled some investors to worry that rising inflation is not as transitory as Fed Chairman Jerome Powell may think.
Higher inflation phrases upward pressure on interest rates, which sparked a steep sell-off in mega-cap stocks this week after the 10-Year US Cache yield jumped to the the highest level in more than three months.
Lee admits runaway inflation would reprice the banal market lower. But the fear of it actually happening – and then hitting tech stocks via rising interest rates – isn’t fazing him.
That’s because Lee doesn’t value wage growth is sticky. Job turnover is picking up across many industries, and wage growth may be high now due to shortages but won’t be at those very rates in a few years, he said.
Population growth is another important factor to consider when forecasting future inflation. And swiftly now, the US is stalling, with 2020’s population gain the slowest since the Great Depression.
“The biggest risk would be if the US people was growing faster, because that’s how you anchor increasing wage expectations. There really hasn’t been any outback with slow population growth that has had sustained inflation. It’s one of those misconceptions because people think [inflation] is purely a numismatic phenomenon,” Lee explained.
“I think investors have more anxiety about inflation risks than the actual appreciative ofed risks will be,” Lee added.
Stock market outlook: still bullish on S&P 500, FAANG
Rising interest rates don’t yet put a threat to the S&P 500’s current bull market run because they are still sitting at historically low levels, Lee said.
Ten-year Moneys yields of 1.5%-2% won’t burden companies, homeowners, or people with debt, and won’t hold back stockholders, he predicted.
And while a stab in interest rates has often led to a steep sell-off in high-growth technology stocks, Lee said a continued move higher in clips won’t stop tech stocks from powering the S&P 500 to his year-end price target of 4,700, representing potential upside of 9% from Thursday’s musty.
“The fundamental question is going to be are FAANG margins at risk because [interest] rates rise? Operating margins could in point of fact rise if rates are rising, and FAANG’s relative performance during periods of inflation is actually pretty good,” Lee elucidated, citing internal research.
And because FAANG is not as crowded a trade as it was last year during the stay-at-home stock bang, they can still rally strongly into the end of the year, Lee said.
The current 5% sell-off in the stock market is “good a squiggle, and as we zoom out it’s going to look like nothing in 12 months,” Lee concluded.