During an interview with CNBC, Lee argued that the very factors weighing on stocks today, including AI pessimism and high borrowing costs, could eventually fuel a reversal.

  • Lee said recent market action is a reminder of just how sensitive equities have become to developments surrounding AI, with even seemingly minor headlines capable of triggering outsized reactions.
  • He pointed to oil prices and interest rates as two of the biggest sources of potential pain for stocks.
  • At the same time, he said investor sentiment toward the AI boom has become increasingly pessimistic.

Fundstrat Managing Partner Tom Lee on Friday said that he sees a potential stock market rebound taking shape as investors grow increasingly skeptical of the artificial intelligence boom and worry about elevated interest rates.

During an interview with CNBC, Lee described equities as a "coiled spring," arguing that the very factors weighing on stocks today, including AI pessimism and high borrowing costs, could eventually fuel a reversal.

Lee Sees A ‘Coiled Spring’ In Stocks

Lee said recent market action is a reminder of just how sensitive equities have become to developments surrounding AI, with even seemingly minor headlines capable of triggering outsized reactions.

But rather than viewing that sensitivity as purely bearish, Lee sees it as evidence that the market could be positioned for a reversal.

"I think yesterday and today are examples of why this market is a coiled spring on the negative side," Lee said.

He pointed to oil prices and interest rates as two of the biggest sources of potential pain for stocks. At the same time, he said investor sentiment toward the AI boom has become increasingly pessimistic.

"I've been meeting with investors on the road since September 28th, and investors are very skeptical of this AI boom," Lee said, while adding that many investors now view AI as a bubble.

That skepticism could ultimately become a contrarian catalyst if upcoming developments fail to validate the bearish narrative, he added.

Why Lee Thinks AI Earnings Could Change The Mood

Lee expects third-quarter (Q3) earnings to provide an important test for the AI trade and potentially restore investor confidence.

"I'm going to be in a camp that third-quarter earnings… it’s going to restore the confidence of AI," Lee said.

The setup is particularly important because concerns about AI have increasingly centered on the amount of capital being committed to the technology, the cost of funding that spending and whether the returns will justify it.

Lee doesn't necessarily see the concentration of AI investment as a warning sign. “I'd rather see a few companies driving the spending,” he said.

In his view, having a relatively small number of dominant companies leading AI investment can actually demonstrate where competitive advantages and economic moats are being created.

Lee also expects the upcoming U.S. midterm elections to remove some of the political uncertainty surrounding AI stocks. Once the elections are behind investors, Lee believes political pressure on AI companies could ease, even if Democrats take control of the Senate.

Why Lee Says Rates May No Longer Be A Threat To Stocks

The other major piece of Lee's bullish case is interest rates. With Treasury yields elevated, bonds and Treasury inflation-protected securities are increasingly competing with equities for investor capital.

But Lee believes the rate surge may be approaching a point where it becomes difficult for yields to move substantially higher.

"We're reaching sort of the peak point there," Lee said.

He pointed to record commercial short positions in Treasuries and the economic impact of elevated borrowing costs as reasons to believe the rate move could be nearing its limits.

Higher rates are already weakening capital demand, Lee said, because some companies can no longer justify issuing debt at current levels. If rates eventually move lower, the impact on equities could be significant.

"I think we're at the point here where rates are no longer a negative story for equities," he said.

During the after-hours session on Friday, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was flat; the Invesco QQQ Trust ETF (QQQ) edged up by 0.01%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.02%. Retail sentiment on Stocktwits toward the S&P 500 ETF was in the ‘bullish’ territory at the time of writing.

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