Transcription
Ladies and gentlemen, welcome back to the channel. Tom Lee just delivered a shocking warning for investors, saying that basically a bear market is coming this year. Now, what does this mean? What is this going to look like? What is Tom Lee saying here? We're going to get into all of it in today's episode. I do have the counter argument to Tom Lee and the kind of agreement argument that I'll make as well. Guys, this is a video you do not want to miss. Let me just tell you that before we even get started here. Hit that like button, subscribe to the channel. Not right now, but if you find value out of the perspective provided in this video. Thank you for watching and let's begin with what Tom Lee here just said and the warning that he just gave investors. It's pretty incredible stuff. Take a listen.
Joins us now. It's good to have you on our program today. Tell our producers investors overreacted to the Fed meeting. It seems to be the consensus, the growing consensus that that was what happened yesterday. Why do you think that?
>> Um, hi Scott. Um, Kevin Warsh has a very different communication style, and he plans to kind of modernize how the Fed monitors data. So, I think the markets took the removal of that forward guidance and even looking at those dot plots as a hawkish pivot. But I think instead, I think it's Kevin Warsh is saying, "Listen, I'm going to be using modern data, real-time alternative data to understand what's going on with inflation, and at this moment, we have no conviction." So, to me, I think it's actually a very market-friendly view. Um, I think the homework now is for investors to understand that if data changes, those dots are going to move pretty quickly. So, I overall, it's actually quite a dovish meeting.
>> So, 7,500 is where we sit right now on the S&P. Been looking for a few different scenarios to play out in the market between now and the remainder of the year. If you think that yesterday was dovish, and a lot of other people thought it was hawkish, and you came into yesterday thinking that we're going to have some moment where the market was going to have a correction of some magnitude, have you changed that view?
>> Um, Scott, we still believe later this year there is going to be an abrupt change of market conditions, one that feels very much like a bear market. Um, but we don't want to stand and call a top. I think conditions are still favorable for stocks. You know, the SpaceX IPO was very successful, and as you know, there's been a cadence of pretty good news coming out of that company, and it is a very small float company with only 90 billion of float. Um, and I think Kevin Warsh, his view, this was actually kind of a market reaction to his first press conference, but I think that the real challenge is going to come later this year. So, I think yes, very much there is going to be a change in market tone, but I think it's too early for people to expect that to happen now.
>> But when you say there's going to be a quote, abrupt change of market conditions, you can't make a statement like that without telling me why you think that. What's going to happen?
>> Uh, well, I think that there are, sorry, let's say, I we can see with pretty good visibility three things happening. You know, one is that we know markets eventually test, especially if a Fed that's redoing the framework with five task forces. I think that's in 2026. The second is that the IPO of SpaceX today, there's very little float, but that's going to unlock later this year in phases along with the IPO of Anthropic and OpenAI. And the third is that because of just the disruptions we experienced so far in the Straits of Hormuz, there is in the supply chain coming shortages. That those are actually the preconditions. I think the fourth catalyst is that speculative firepower runs out. Um, that will happen when some things like margin debt experience levels that are associated with short-term corrections. Or it could be that you could see a lot of cash move off the sidelines. But I don't have any sense that investors are that bullish yet. So, to me, I don't think that fourth piece is in place yet.
>> All right, good stuff, Tom. Talk to you soon. Thank you.
>> Okay, so we have a lot to unpack there. First and foremost, Tom Lee is in agreement with myself that the Fed meeting was actually quite dovish. Yes, it was. The dot plot was in line with expectations. There was nothing shocking there. Kevin Warsh said, "Look, the viewpoint around the table is at the Fed table, we don't hold a lot of conviction in the dots that we wrote down." I think that's because oil just came down a lot, and the Fed is like, "Look, maybe we hike rates this year, but really, we might not do anything." Wall Street took that as, "Oh my gosh, we're going to get more hikes." It was the wrong interpretation. And so we sold off Thursday. We kind of came back a little bit on Friday. What we want to watch for now is how the economy plays out, how the data plays out with inflation. Because look, if the Fed's not going to kind of give forward guidance or tinker with expectations, you have to understand the Fed does always what the markets are pricing in. So, whatever the markets are pricing in on this Fed funds rate monitor tool is what they're going to do. Good news is, six weeks from now, you're not expecting a Fed rate cut or rate hike. 69% probability of a pause, 31% chance of a hike. Now, next week is going to be very important. If we get a hot PCE report, well, you might start to price in a hike. If the Fed's not going to give you forward guidance, the Fed is unless they're changing this, which the Fed has always for 40 or 50 years now done what the markets are pricing in, and I think the Fed will continue to do that. Um, there's a chance they might not, but that's where this is going to get very important.
Now, my viewpoint is oil has come down a lot from the over $100 a barrel point down to $77 today. There's going to be downwards pressure on inflation. PCE next week, we kind of already know what to expect, but CPI coming on July 14th is going to be absolutely critical. The next Fed meeting is July 29th. So, depending on how that CPI report comes out, it's going to move a lot. It's going to do a lot in terms of moving the projections for Fed policy. Now, we also have Fed speakers in this upcoming week, and that's going to be important as well, kind of to get a consensus on, look, what does the Fed mean here when Kevin Warsh said they don't have conviction in the dots? Does that mean they're leaning more towards not doing anything this year? Or does that mean they're leaning towards being a hawk? I think this is the single biggest thing in the markets right now: the Fed and the AI trade. And we'll talk about the AI trade in just a moment because Micron reports earnings later next week. And look, if we're going to have market conditions that feel like or look like a bear market as Tom Lee said, it's the AI trade that's going to cause that. So, instinctively, Tom Lee's saying that, Tom Lee's basically saying the time is running out for the AI trade. That's what Tom Lee's saying. There's no other way because of the market waiting, right? You cannot have something that looks like a bear market without the AI trade coming down significantly. It's just impossible from a market waiting perspective. We'll talk about that in just a moment.
But look, the Fed, I want to make this very clear from my perspective, okay? Normally, and I talked about this in the last video, but normally when the Fed is raising rates, it's actually a really good time to be an investor, okay? And I'm going to scroll down here. This is the federal funds rate over time, just so you guys can all see this. But like in recent history, right? The Fed raising rates is good. From 2004 through 2007, the markets went up 55% on the S&P in this three-year period. The Fed took rates from 1% to 5%. Normally, that's because the Fed is raising rates to cool off a hot economy, okay? And we'll come back to that in just a moment. 2015, rates were at zero. The Fed brought those up to 2 and a half percent by 2019. The markets went up 75% in this four-year period. So, all you know, the last, well, outside of 2022, which was really like an inflation problem, the Fed raising rates was actually really good for markets. Two out of three times, you got a 66% hit rate for positive stock market gains, okay?
Well, the problem is right now is look, normally the economy's good, and that's why the Fed is raising rates. The economy is not good right now. The economy is not good at all right now. The consumer is not good. The labor market is okay at best, okay? The housing market is absolutely terrible. The average consumer delinquencies have never been higher on things like credit cards or auto loans. You can't say the economy, the consumer economy is good right now, okay? So, from my perspective, if the Fed begins to hike rates right now, your odds of a recession go up dramatically. Like, today I would say the odds of a recession, if my base case follows through, and my base case is inflation comes down, the Fed does not hike, they don't cut, they don't do anything from here, maybe they cut next year would be my base case. If that happens, we don't have to worry about a recession in my view, right? The consumer is going to get stronger, like so on and so forth. That's the most likely scenario here, in my view. But here's what I'll tell you. If something happens with the deal with Iran, and oil goes up again, if the conflict begins again, if things go wrong, if the Fed hikes rates right now, your odds of a recession, I think go from like 10% today to like 70 or 80%. Just with a couple of rate hikes. I would be dramatically reducing my long exposure in this market if the Fed raises rates. Okay? I would take my long exposure today from around 100%. I'm basically totally invested in this market, probably down to 30 or 40% invested in this market. I would raise a dramatic amount of cash, okay? Because this environment is a lot different than 2004 through 2007 or 2015 through 2009, where the Fed was fighting or trying to cool down a strong economy. This economy's not strong. The only reason we're not in a recession right now, mathematically, is because of the AI trade, okay?
Well, that brings me to my next problem. And what Tom Lee here says, basically, that AI could have a problem later this year. Look, we have Micron earnings next week, okay? Micron earnings next week is going to be critical. Why? Because, look, these stocks have rallied a lot, okay? Micron going to report earnings next Wednesday. Let me see if I can pull this up. Micron reports earnings next Wednesday. Look, everyone's bullish on this trade. Everyone's crowded in this trade. As long as we don't get rate hikes, can cyclicals, financials, and small caps, and software, you know, if the AI trade calms down a bit, those other areas are going to work really well. But if the AI trade calms down a little bit and the Fed is raising rates, yeah, the biggest form of what's keeping us out of a recession, which is the AI trade, is going to give way, okay? And your odds of a recession dramatically go higher. The rest of the markets are not going to work if the Fed begins to raise rates. Now, the AI stocks could continue to work if the capex trade continues to work. But, from an investing perspective, you know, when you watch Micron go up from $100 to $1,100, over a 10x in 10 months, right? Yeah, that's unsustainable. So, Micron earnings next week, it's going to be very hard to impress investors and for the stock to go higher, okay? And I think you're going to run into this theme over the next one to three quarters, where it's going to be difficult, even with great numbers, for these stocks to go up. So, your most likely path here is lower.
So, within Tom Lee's warning that this market could feel like a bear market, you know, I think it comes down to these stocks that are up a lot, like this company, okay? AAOI or yeah, Applied Optoelectronics. Like I was I just seen this ticker on X and I'm like, "Huh?" $12 billion company, I really haven't heard of it too much about this stock, right? Since February of this year, the stock has went from 50 to 230. And this is the case across the board for AI stocks. Expectations are through the roof. And while yes, these companies, they're going to have good numbers. They're doing good. They're doing big things. They're priced for it. So, there's no room for error. Like just like Broadcom, right? Broadcom may have been the canary in the coal mine. Just the first one to kind of tell you, "Look, we're not going to be able to continue to impress investors, whether that's a supply issue, most likely a supply issue. Doesn't matter. This trade is at risk right now. And everyone's crowded in this trade. Everyone's long AI stocks, right? From retail to institutions, everyone. So, all I'm saying here is over the next couple of weeks, as you get earnings, it is going to be very difficult for AI stocks to go higher. Now, that's going to feel like a bear market if these stocks come down 20, 30%, which would be kind of minimal compared to the rallies that they've seen.
Okay? At the same time, if inflation goes up, if the deal with Iran falls through, you could theoretically have the same at the same time as the AI trade is kind of failing or consolidating, going through a correction, you could have rate hikes start to get priced into this market. And then what's going to happen when these AI stocks come down? Hyperscalers may or may not pull down CapEx guidance. You know, maybe CapEx guidance just can't go up anymore because there's not enough supply, right? If you can't spend the money, you can't spend the money. Markets are not going to like if hyperscalers don't raise their CapEx guidance. We'll see what happens ultimately, but there's a pretty rough scenario here where AI stocks come down over the next one to three quarters and the Fed actually does hike rates.
Now, good news is I don't think the Fed is going to hike rates. I don't really think that we're going to have oil supply issues. Supplies coming online faster than expected right now, and companies are generally pretty good at managing their supply chains. I'm not seeing or hearing a whole lot of issues around oil supply later this year or petrol product shortages. So, I don't know where Tom Lee's getting that from. I don't really necessarily agree with that. But, I do see what Tom Lee's saying here. You know, I've kind of been more neutral on AI stocks for a while now because, yeah, a company can be doing great and be a bad investment. Because everyone's long these stocks. Everyone's bullish. Everyone's expectations are through the roof, you know? As long as the Fed does not hike rates, I think we're fine. I think AI stocks can consolidate. And at this point, when the markets are pricing in two rate hikes, if the Fed does not hike at all, small caps, financials, cyclicals, software, the rest of the markets, areas of industrials, they're going to come roaring back to life, and you're going to have this counterbalance in the markets.
Okay? Well, there's also the scenario that inflation just takes a little bit longer to come down and the Fed makes the mistake of hiking rates. At the same time, the AI trade begins to come under some pressure. In that scenario, I think you'd want to really reduce your exposure to the markets. So, right now, I think there's over a 50% chance that AI stocks have a problem in the next one to three quarters. They come down 20, 30% across the board. Um, so I think that is most likely. I think there's only like a 20 to 30% chance the Fed actually hikes rates. So, on net here, I'm pretty bullish on the rest of the markets. But, if CPI on July 14th comes in high, PCE next week comes in high, you could look at a pretty rough scenario. Again, I think there's a 70% chance that CPI comes in lower than expected on July 14th. Okay? And the rest of the markets can work. So, that's what's kind of difficult right now. And look, if the Fed is if the Fed begins to hike rates, and the AI trade, some of the air comes out of that, yeah, recession probabilities could skyrocket quickly. And that's not going to be great. The economy is not so strong that you can withstand the AI trade failing or going through a correction, and the Fed hiking rates. It's just improbable.
Okay, so I want to give you guys a little bit of probabilities on this from my perspective, okay? This is just my perspective. I think there's a 70% chance the AI stocks come down in the coming months, okay? I know this is a not consensus view. I know everyone's bullish this stuff. But, that's why you should be nervous, right? Um, you know, when stocks go up 10x in 8 months, they're going to come down aggressively at some point. That really has not happened yet, but I do think Broadcom is kind of the canary in the coal mine here, where it's just going to be really hard to impress investors. Maybe demand is there, but we could have a supply issue on our hands. So, I think there's a 70% chance that AI stocks come down in the coming months, okay? I also agree with like Tom Lee, the supply from SpaceX and new IPOs from Anthropic, OpenAI is not going to help the supply side of that equation.
I think there is an 80% chance the markets are overly hawkish on the Fed. Okay? This could look like a rotation out of AI stocks into the rest of the market. I think there's probably an 80% chance that that happens. Okay? That we get some of the areas that have been overlooked that come back, right? AI stocks sell off a bit. AI is still alive and well, just expectations went too high, too quickly. And the rest of the markets benefit. If the Fed is at this point going to be more dovish than expected, that's a strong tailwind for small caps and cyclicals, financials, and software, right? I think there's a 20% chance the Fed makes the mistake and hikes rates. At the same time, AI stocks come down. Okay? In that scenario, I would reduce market exposure dramatically and quickly. Maybe in a single day. Okay? If the Fed hikes rates and AI stocks begin to come down, that would not be good. Because AI stocks, they're the reason why the markets look as good as they do. If those AI stocks come down and the Fed begins to hike rates, nothing's going to work essentially in this market. Nothing. Okay? There would be no bull market in that scenario. Like anywhere. You know, software's not going to work, small caps aren't going to work, cyclicals, financials aren't going to work if the Fed's hiking rates. If AI stocks don't work and Mag 7 doesn't work? Yeah, it's going to look like a bear market quickly. In this scenario, I would reduce market exposure dramatically and quickly. Again, I'm like 100% invested in this market right now because I think the 80% probability the markets are overly hawkish on the Fed means upside for software, cyclicals, financials, right? I really don't like the probability of AI stocks continuing to skyrocket here. I don't like the probability of that.
Okay. Now, what to do right now? Okay, if I was the average retail investor, I'm riding high AI stocks. This is what I would do. I would take profits in hot AI stocks. Okay? Nobody ever went broke taking a profit. I know it sucks to take a profit and watch them go up a little bit, but that's the smartest thing to do right now. Again, I think there's a 70% chance in the coming one to three quarters AI stocks come down because they priced in too much good news. Okay? So, take profits in hot AI stocks. Wait for the dip. AI will be back, right? You want to buy stocks when they are out of favor. Okay? That means you want to buy financials. You want to buy small caps. You want to buy cyclicals. You want to buy software. The forgotten parts of the market. Okay? Berkshire Hathaway in the years leading up to the dot-com bubble fell 50%. Okay? During the dot-com bubble when it actually popped, Berkshire Hathaway went up 80% from 2000 through 2002. Nothing was wrong with Berkshire Hathaway, but when there's a shiny new object like AI stocks in the markets, everything else gets forgotten about. Now, I don't think this is the moment the bubble pops, but the same logic applies. These other areas have been forgotten about. Financials, small caps, cyclicals, software. You want to be buying these areas of the market. Again, because I think there's an 80% chance the markets are overly hawkish on the Fed. I don't think we're going to get rate hikes. I do think maybe in this upcoming week some of your Fed speakers like Waller and you know, some of these others are going to paint a more dovish picture. Okay? So, we'll see what happens there.
Number four, come to your own conclusions. These are my opinions, my expectations. And look, a lot of people are not going to agree with this. So, if you don't agree with this, like, do what you want. Put your own money where you want. I do not like chasing AI stocks that are up 10x in less than a year. Okay? When in all reality, at some point the music's going to stop. I think AI will be back. But again, is there opportunity here? I don't think so. I just don't see it in the near term. A year or two from now, is there going to be another 5x opportunity in AI stocks? Are we going to have another AI stock wave? Sure. I just don't think it's right now. I think now is the time to sell. You want to buy AI stocks when they are out of favor. Okay?
Um, so the main reason I'm actually bullish right now is because I think the markets are overly hawkish on the Fed. Okay? These are my thoughts. You know, this kind of ties into what Tom Lee was saying here. Like if the markets look like a bear market, it's because of AI stocks. There's no other way to put it. The rest of the markets have really not done well. Small cap software, cyclicals, financials, these areas have sucked for a while. Okay? They're the forgotten parts of the market. But, you know, if AI stocks come down 20, 30% across the board, even if financials, small caps, cyclicals, software, other areas of the markets like industrials rip, it's still going to feel like a bear market for a lot of people. So, most importantly, come to your own conclusions. Let me know your thoughts on this down below in the comment section. You know, let me know your thoughts around the Fed. Do you think they're going to hike rates? What do you think the probability is that they hike rates? I think that's the most important question right now. Okay? And I just think the markets took Kevin Warsh the wrong way. And that's partly why I think there's an 80% chance the markets are overly hawkish on the Fed. So, let me know your thoughts on this down below in the comment section. Are you bullish? Are you bearish? What are you doing right now? Let me know all of that. If you guys want to come trade and invest alongside of us, that link is down below in the description of today's episode. Have a fantastic rest of your day, and I will see you in the next one.