Tom Lee: AI trade still in very good shape despite questions about durability
Speakers
Tom Lee
— Managing Partner & Head of Research, Fundstrat
Brian Sullivan
— Anchor, CNBC (Last Call / Power Lunch)
Summary
Tom Lee of Fundstrat argues that the AI trade remains robust and will perform well through year-end, while broader equities face near-term headwinds from margin debt deleveraging. He also sees the Fed's potential balance sheet tightening as a bullish catalyst that would clear the path for rate cuts. The host adds that oil prices are likely to drop if peace talks succeed, which would reinforce the view that tariff and oil-driven inflation is temporary.
- AI trade seen as most important equity driver, with durability doubts acting as a contrarian bullish signal
- AI expected to work strongly through year-end despite questioning similar to the 1994-2000 internet period
- Margin debt buildup creating a stall in equities, reminiscent of Korea's margin call episode
- Quantitative tightening would be interpreted as paving the way for future rate cuts, thus a positive for stocks
- Shelter and wage data suggest underlying inflation is weakening, with tariffs and oil seen as temporary pressures
- Oil prices likely to decline if a lasting peace is achieved, reinforcing a transitory inflation narrative
Ideas
Oil falls if lasting peace arrives
Oil prices are down on peace talks and, if and when lasting peace is achieved, oil will likely go back down. The market seems inclined to push oil lower in that scenario, which would also influence the Fed to see inflation pressure as temporary.
AI trade still strong through year-end
The AI trade remains the most important story for equities and is still in very good shape despite doubts about its durability, similar to the questioning phases during the internet era. The fact that many investors are questioning AI's longevity is actually a contrarian bullish sign, suggesting the market has not topped. AI should work strongly through year-end.
Margin debt overhang stalls stocks
If the Federal Reserve shrinks its balance sheet (quantitative tightening) instead of hiking rates, the stock market will interpret this as paving the way for future rate cuts, making the move overall positive for equities.
