Tom Lee: Markets will move higher in March but bear market will hit later in the year
Speakers
Tom Lee — Co-founder and Chief Strategist, Fundstrat
— Fundstrat co-founder
Summary
- Tom Lee predicts US equity markets will rally through March, but warns of a potential 20% bear market later in the year when markets stop responding to good news.
- Higher oil prices are viewed as a net positive for US equities because the US is a net energy exporter, driving relative economic outperformance compared to importing nations.
- In an environment of scarce global growth driven by high input costs, capital flows into growth stocks, disproportionately benefiting the US market.
- The software sector has likely bottomed, with the IGV ETF forward P/E multiple compressing to 16x, pricing in negative risks early.
- Bitcoin has washed out significant speculation and leverage following a major deleveraging event, potentially forming a base.
Trade Ideas
"It's very confusing time. I think it's very difficult if someone's trying to trade both the headlines or trade oil." Oil markets are currently driven by erratic and sometimes erroneous news headlines rather than pure fundamentals. This creates unpredictable, choppy volatility, making it a poor environment for directional trading. AVOID direct exposure to oil commodities as the headline-driven price action creates an unfavorable risk/reward profile for traders. A clear, sustained geopolitical event could establish a strong, tradeable trend in oil prices that bypasses the current headline noise.
"We think higher oil prices are actually good for the US stock market... US is an export of oil. So we net benefit as an economy... when growth is scarce, people buy growth stocks. The US stock market is a growth index." High oil prices act as a tax on global growth, particularly for energy-importing nations. Because the US is a net exporter, its economy is relatively insulated. As global growth becomes scarce, international capital will flow into US equities, specifically growth stocks, driving up broad indices like the S&P 500 and Nasdaq. LONG US broad market and growth indices as they benefit from relative economic strength and safe-haven capital flows during periods of high energy prices. Oil prices rise to a level that triggers a severe domestic recession, or the delayed bear market catalyst materializes sooner than expected.
"I think software has bottomed because we tend to price in the negative risks early... the IGV which is the software ETF index has lost five multiple points. Now the forward PE is 16 times." The software sector has already endured its own bear market, washing out speculative premiums. With multiples compressed to cyclical levels (16x forward P/E), the downside risk is largely priced in. Companies with durable, recurring revenue models offer an attractive risk/reward entry point. LONG software equities as the sector has de-risked its valuation and offers durable business models at a discount. A broader macroeconomic slowdown could cause enterprise IT budgets to contract, leading to earnings downgrades that make the 16x multiple look expensive in hindsight.
"We have gone through a winter where a lot of the speculation and the leverage is gone." Bitcoin failed to act as a safe haven during recent market turmoil due to a massive internal deleveraging event. However, this flush-out has removed weak hands and excess leverage from the system, creating a cleaner market structure that could support a sustainable base. WATCH Bitcoin for signs of accumulation, as the removal of systemic leverage reduces downside tail risks. Lack of new fundamental catalysts or further regulatory scrutiny prevents fresh capital from entering the space.
