Tom Lee: Why the Bull Market Isn’t Over Yet | 2025 Market Outlook

really delighted to be here at Future

Proof. This is I think uh the best

financial conference. I guess it's

really a festival. Um and I'm excited to

do a presentation for you. I've got a

lot of slides to get through, but I want

to cover really how to think about the

next 12 months and think about some of

the most important themes driving

stocks. And before I forget, uh Funstrat

does have a booth here. So if you want

to go visit us, we're just down that

way. Uh we've got everyone here.

Tireless Ken, Mark Newton, Sean Ferrell.

So you can meet everybody.

Okay, so here is the rough outline. Um

foremost, I want to tell you I think

we're still in a bull market and I think

it is about US leadership versus the

rest of the world. Uh I think it's going

to be clear as I walk you through the

reasons for that. And the first place to

start is why I think the investment

outlook is better now than it was at the

start of the year. So the S&P is up 10%

year-to date. You can see that huge dip

that started uh in February was a

waterfall decline in April. I think a

lot of people panicked uh and

unfortunately sold at the bottom. But uh

we had advised folks that when you see

waterfall declines, as long as you don't

have a recession, markets will stage uh

a reciprocal recovery, which is in fact

what happened. So think of that decline,

which in a way was a bare market because

it reset positioning uh and now we're in

a new bull market, but that was actually

a very predictable recovery.

And uh so if you ask me where I think we

are by the end of the year, I do think

it's a strong fourth quarter. So I think

the S&P gets us to 68 6900

uh possibly higher. Mark Newton does

think again similarly that we're going

to have a big fourth quarter.

Uh and there's a couple reasons for

that. One, corporate profits are strong.

Household balance sheets are still

strong. We've got a lot of AI

visibility.

Something to think about many people

don't is the financial sector is about

to have some pretty big productivity

gains coming the next three to five

years and I'm going to cover that in

this presentation and the Fed is going

to cut rates. Okay, so let's start with

the ISM.

The ISM is still below 50. It's at 48.7.

If you're not familiar with it, it is

the most widely used uh measure of

manufacturing confidence and it's 31

months now below 50. That is the longest

stretch in the history of the index

itself.

And as we point out here, you've never

been late cycle in the stock market when

the ISM is below 50. In fact, you've

always been midcycle, early cycle. So,

it's actually a very bullish sign that

the ISM is still below 50.

And in terms of households, I think the

biggest reason to be optimistic on

households is that there's still a lot

of pent-up demand. In the last 10 years,

we've actually created 15

million household formations, meaning

the number of people that need housing

units. And yet, we've only built 13.5

million homes. So, there is a shortage

of housing. And that is a contrast to

2008

when we had 10 million household

formations and 17 million homes built.

So instead of an excess of housing, we

have a shortage. That's a, you know,

that's future demand.

The Fed is more dovish this year as well

and I think it's going to play into

September. You know, as you know, a lot

of people are warning you about this

month saying stocks could decline

uh because that's the seasonal pattern.

But we think um stocks will do well this

month. And the reason for that is the

Fed's been on hold and and for the first

time this year, they're going to cut. In

the last 50 years, that's only happened

twice. 1998 and September 2024.

And as this chart shows, in September

1998, the S&P was up 6%. And in 2024, we

were up 2%. So it really contrasts with

the seasonal pattern. And that's why I

think we're going to do well this month.

And in terms of cuts, I don't really

know. I'm not a Fed watcher, but I'll

tell you the bond market thinks there's

three cuts this year. That's one more

cut than the Fed has guided to, and next

year two and a half cuts. That's a lot

of easing that's coming. And I think one

of the places you'll see it is in

mortgage rates. Um the spread between

mortgages and the 10-year yield is

2.43%.

And since 1970,

that spread is 1.7%. So mortgage rates

will follow the 10-year, which may or

may not go down, but then mortgage rates

itself could drop 70 basis points. So I

think you could see a mortgage rate in

the 5 and a half% range next year, which

is a pretty big improvement in mortgage

cost.

Okay. Now, here's a third point that's

really important, and I think You have

to start to sit back and think about

this, which is the stock market has had

six stress tests in the last five years.

Okay, that's unusual. Um, these are what

I would call black swan events. You

know, you you normally expect these to

happen every 10 years, but we had six of

them in five years. The first was the

COVID shutdown.

And then in 2021 after the economy was

shut down, we had the bullwhip supply

chain effect. You guys remember that

suddenly factories turned on. There was

a lot of confusion, a lot of ordering, a

lot of shortages. No, nobody really knew

if things were short or demand was too

high. Then we had a massive inflation

cycle in 2022.

And then the Fed followed that with the

fastest Fed hikes in history, which

caused a heart attack for the economy.

And then in April of this year, we had

the tariff global disruptions which was

the essent the same as the Cuban missile

crisis. We had the entire world uh

watching for a single moment and it

slowed everything and it caused a stock

market crash. And then in June of this

year, the US bombed Iraq's nuclear

facilities, which if you take any of

these six events and before any of them

happened, if we said this will happen in

the next 12 months, almost all of us

would have agreed each of these would

have caused a recession and a bare

market. But instead, the stock market

survived. And this is the PE, the S&P.

You can see the equal weight of the

market PE is now 17 times. Now, some of

you might say that's expensive. Okay,

but I disagree because the PE of the S&P

was 18 times before any of these black

swans happened. So, the market is

cheaper today after six black swan

events. But here's the point I'd make.

You had six black swan events that

should have wiped out the stock market,

should have wiped out profits, caused a

recession, but the economy survived and

the stock market survived. I would argue

the PE of the market should be going up.

And that gets us to the next point,

which is I think there are two reasons

to expect US growth to outperform

expectations.

The first is that AI is still in the

early stages. Um,

okay. Uh, I'm just pulling up numbers.

These are estimates for IT spending

around AI, but IDC just published their

most recent report and they are

forecasting 1.3 trillion of spending by

2029. I mean, that's a huge number.

Okay. um and look at the level of growth

compared to where it is in 2024. That of

course is a huge driver of spending

and yet the stock that's probably the

most important and a beneficiary of that

is Nvidia and you can see here it trades

at 26 times earnings. Now

some of you might look at that chart and

say wow it's 26 times this is expensive.

Now, keep in mind, number one, this is

the scarcest company in the world today.

They sell a product that every AI

company that's going to spend $1.3

trillion a year needs. There really

isn't going to be a $1 trillion LLM

without using Nvidia.

And yet, it trades at 26 times earnings.

By the way,

Costco trades at 49 times earnings and

Walmart trades at 39 times. So, in a

way, Nvidia would have a higher multiple

if they sold membership cards

or rolled back prices to $9.99.

But you get the point. If Nvidia traded

at Costco's multiple, the stock would be

over 300. I think Costco is a lot less

scarce than Nvidia. So if you ask me, if

Nvidia is cheap, the AI trade is still

massively undervalued.

And there's a lot of productivity.

Google, this is a CNBC story. Google's

eliminated 35% of managers overseeing

small teams. That's productivity.

Now, there's a lot of people that say

that this is an AI bubble. In fact, uh,

at Funstrat, uh, that's something we

hear a lot because we hear from our

clients. We have roughly 10,000 RA and

family office clients, and we hear from

them a lot. Not everyone's bullish on

AI.

And but here's the reason to be bullish

on AI. The world has a structural

shortage of labor. The blue line is the

prime age workforce globally. And as you

can see the growth rate is slowing.

Okay. But the gray line is the total

world population which is growing faster

than the prime age workforce. So as that

blue line shows, we have a structural

shortage of labor which is the first

time since 1973.

So think about this. Starting in 2018,

the world actually had a shortage of

prime age workers. but for two

generations. So many of us who started

covering stocks in 1973 and I started

covering stocks in 1973

when I was young. I'm just kidding. But

um for 50 years, people who invested

never had to think about labor shortage.

But actually that's changed. And how

does that change how you should invest?

Well,

I have a chart going back to 19

1947.

And in the United States, because we

have a lot of data here, there have been

two other times where the US had

structural labor shortage. 1948-67

and 1991-9.

And in the gray box, I highlighted that

whenever there's been labor shortage in

America, technology spend goes

parabolic. It makes a lot of sense. What

it's saying is if you don't have enough

workers, then companies have to find

nonhuman workers. Well, we're entering

the third phase. And that's why folks

are calling this a super cycle for AI.

And the bottom chart here is technology

stocks.

Above is that labor shortage for the US.

You can see tech stocks have gone

parabolic every time the US has labor

shortage. So this is the third cycle for

labor shortage and we think tech will at

least become 50% of the S&P.

Now I want you to say or think about

something. Someone will say oh well if

there's labor shortage then all these

other countries benefit. That's not

true. when the world had surplus labor

that's then the companies with cheap

labor benefited China, Asia, India,

Africa.

But if there's labor shortage,

you still might want to find cheap

labor, but only India and Africa have

supply, you're actually going to try to

find nonhuman labor. And the biggest

supplier of that is the United States

with AI and robots. You know, there's of

course Japan, China, and Germany, but as

this chart shows,

all of the best tech companies

uh and the biggest, you can see by the

size of the circles, are basically US

businesses. So, in the next 10 years,

the choice people will have to make is

the next largest supplier of robots and

tech is China. But is the world going to

prefer to buy these from the United

States or from China? And in my opinion,

they're going to choose the US because

that's really been the case. You know,

of the 25 largest stocks in the world,

uh, only four are not from America. Um,

but everything else is really the US.

So, if you ask me, when it comes to AI,

and I know there's a race with China and

they've got good AI, I still think the

winner is the United States.

And then that gets me to the second

driver of the US, which is blockchain.

Wall Street is finally embracing

blockchain and not because they're

becoming believers in crypto. They

believe that this is a way to improve

the cost and productivity of their

business.

Okay. Now, this is going to take a

little time to explain because I don't

think people are talking about this. But

let me explain to you why. If we're if

our view is correct on blockchain,

Wall Street stocks like Goldman Sachs

and JP Morgan are going to become a lot

more profitable. Their margins are going

to go up. They're going to become a lot

less cyclical and their pees will

probably look more like tech stocks.

So, I have to go all the way back to

1971

because in 1971,

the dollar became synthetic. Now, you

may not know what I'm talking about, but

in 1971,

the dollar was no longer convertible

into gold, which means the dollar

became a synthetic instrument because

you could only exchange it for a dollar.

Now, think about what that means.

In 1971, a lot of folks got scared and

they said, "Well, I got I want to buy

gold instead." And actually, that was a

great investment.

But if everyone bought gold, the US

economy would have collapsed, right?

Because the dollar represented nothing

but itself.

So, you had to create a system where

people would believe the dollar was

useful.

And that was what Wall Street did. They

created all these financial products

because the dollar became synthetic.

Money market funds in 1971, currency

futures in 72, debit cards in 78,

mortgage back securities, currency

swaps, interest rate swaps, S&P futures,

zero coupon bonds. I mean, a lot of

these you guys all remember exchange

traded funds. If Wall Street didn't do

that, another currency would have become

dominant. But that's not what happened,

right? The dollar today is 80% of all

financial transaction quoted pairs. So

it when we went to a gold off the gold

standard the dollar became the dominant

pair

and in fact seven of the large top 30

largest companies in the world are banks

including JP Morgan, Visa, Mastercard,

BFA etc. Okay well in 2025

which is two generations later

it's not just the dollar that's becoming

synthetic.

Everything is going to become synthetic.

Let me explain that. The first is the

Genius Act, which is the what the what

Congress passed earlier this year, which

creates the stage for a stable coin

boom.

And then the SEC announced Project

Crypto,

which is encouraging Wall Street to move

on to the blockchain. Remember the

blockchain is a public software

basically gigantic public software but

what it does is it verifies transactions

and it stores records and information

and it eliminates a lot of the costs and

friction that Wall Street experiences

today.

In fact, Treasury Secretary Besson

believes that just the stable coin

market could be 3.7 trillion compared to

$250 billion today. That's exponential

growth as we start to see Wall Street

move things synthetically onto the

blockchain.

So what does that mean? Well, if

everything's get becoming digital, okay,

you've heard a lot of people say, well,

you want to find the digital store of

value, the digital gold, which is

Bitcoin.

And that's makes a lot of sense. That's

what Funstrat has been advocating for

since 2017.

That was more than eight years ago. And

in fact, Tireless Ken remembers when we

first started writing about Bitcoin in

2017 and we said it would be an

institutionally adopted as digital gold,

people ridiculed us. Uh we lost a lot of

customers actually because they thought

we uh really lost our grounding to

reality.

But as you know, eight years later,

that's the narrative. Bitcoin is digital

gold. Well, let's think about the next

10 to 15 years.

Wall Street's going to build a market

for digital assets. Now, for reasons I

won't cover here, it's going to be on

Ethereum because that's really where

everyone is building this future. But

the thing I want to highlight today is

that Wall Street is going to build a

market for digital assets onto the

blockchain. So, it's more than just

dollars. It's everything.

So, think about this. There's two story

arcs that are going to be the next 10 to

15 years. Why I think it's the biggest

macro trade. The first is stable coins.

The upward one, stable coins. We're

going to tokenize stocks. NASDAQ

actually just approved that this week.

We're going to tokenize credit, tokenize

real estate.

Maybe we'll monetize our reputations on

the blockchain so we can value that. and

will monetize intellectual property

which as you know is the largest

component of capex today. So if you look

at GDP data from BEA and you look at the

what they call private investment

spending the largest share of that is

intellectual property that is easily

moved onto the blockchain. But then

there's another story arc. If you're

going to be able to digitize that

information, you're going to monetize

data collection, royalty streams,

loyalty programs, as you know, that's a

huge business is, you know, the value of

your frequent flyer miles. Then there's

going to be a AI and things like proof

of humanity. So that all is what you're

going to see in the next 10 to 15 years.

This is the biggest opportunity for Wall

Street ever.

Okay, so that gets me to the last point

and I believe there'll be time for

questions, too, which is I've given you

five reasons to be bullish on stocks,

but yet this is the most hated rally

ever. And I believe I know the reason.

I'm going to explain it, but don't get

angry at me if that's the reason. Okay.

Um, first uh it is in our view the most

hated V-shaped rally because at

Fundstrat we survey people. We ask them

how they're positioned, what they think

of multiples.

This is not the we get cautious

sentiment and skepticism. That's not

what you expect at the top. And that's

healthy. If people are skeptical at the

top, that means there's still plenty of

room for stocks to go up. And we can see

it numerically. I like this survey. This

is the AI bulls less bears.

It's currently negative 10.7. That means

there's more bearish people than bullish

people.

And in fact, for the last five weeks, as

the markets made all-time highs,

uh the net bulls is bearish. Do you see

it? Minus 11. We've had five weeks while

the markets made all-time highs and

everyone's skeptical.

In fact, uh if you This is from Tireless

Ken. you looked at all the times the

market had a 25% or more rally and I put

a red dot.

Usually sentiment's quite bullish by the

time you had a 30% rally. We've had a

34% rally and yet the average sentiment

is still negative.

That tells me first of all that most

people went to cash in April. They

didn't think we'd recover. And I don't

blame you because I remembered at the

April lows, we heard a lot of people

tell us, Tom, there's no way we can

recover because the Fed's not going to

cut rates or expand the balance sheet.

So, you don't have any liquidity coming.

Our argument was that waterfall declines

always see reciprocal recoveries.

Okay. But I believe the reason

people are bearish is because of

political affiliation.

So, please do not judge me. I'm

registered independent. But I want to

point out some facts. I am a registered

independent and I didn't vote for either

candidate in this last election.

But if you look at uh the general

population,

the US is 50/50 roughly between

Democratic affiliated and Republican.

Okay, so it should be half.

But if you look at the University of

Michigan survey respondents and we tr

you know they published the affiliation

60% of the people that respond to the

umish survey are Democrats. So when you

see us inflation and confidence just

remember it's skewed because more people

who respond are Democrats. The media we

know political affiliation is 89%

Democratic

and we know that if you look at

contributions by Federal Reserve

employees 92%

donated to the Democratic party. Okay.

So

as we run that down again half the world

is half the United States is Democratic

half is Republican but media and the

Federal Reserve skew democratic.

Well look at the equity market.

57% of employees in the stock business

are democratic,

67% of hedge funds, and 69% of venture

capital. Okay? So, the equity world or

the risk-taking world leans Democratic,

which is the opposite of who's in the

White House today.

Whereas the bond market, 83%

of those who work at savings and loans

are Republican, mortgage bankers 64% and

commercial banks 60%.

So the bond market leans Republican.

That might explain something to me

because if you ask me in 2025, why did

we not get bearish?

It's because the high yield market

barely reacted to the tariff headlines.

spreads didn't blow out. So, we figured,

well, if the bond market says the

economy is fine, stocks should recover.

So, I think the reason why you might be

bearish or your friends might be bearish

is that the stock market

is primarily Democratic and they think

Trump is crazy, whereas the bond market

leans Republican and think everything's

fine. I believe this is the reason it's

the most hated V-shaped rally.

And so, uh, I got a few closing points.

Well, first I just want to show you the

survey. I mean, look at the Yumish

survey. The Yumish survey, if you ask

about inflation,

Democrats respondents say inflation's

6%. Two months ago, they said it was 9%.

Republicans say it's 1%. So, you can see

there's a huge political divide.

I mean, unless they shop at different

stores. Um,

okay. So, this is how we want to be

positioned. first uh you know we like AI

and crypto so that means MAG7

Bitcoin and Ethereum

but we also like industrials financials

and small caps because that's a play on

the dovish fed

and uh the last set of points here is

more just a reminder the first is you

have to remember the rule of 10 best

days I know there's going to be a lot of

folks here who are really good at market

timing uh I'm not one of those. Okay,

but here's the thing. Since 1928, the

S&P has returned 8% a year. That's the

first row.

But if you missed out the 10 best days

in the S&P out of the 220 trading days,

your return is -3%.

Think about that. If you missed out just

on the 10 best days in the S&P in every

year, you had negative 21%. a negative

13%. Since 2015, that's still true. The

S&P has returned 12% a year, but if you

missed the 10 best days in the S&P

in 2015, since 2015, every year, you had

a negative 10% return. Let me just show

put this in numbers for you. In 2023,

the S&P was up 24%.

If you missed the 10 best days, your

return was only 4% in 2023. In 2024,

the S&P was up 23%.

If you miss the 10 best days, your

return is only 4%. So, you get our

point. You miss out on most of the gains

if you sit out the 10 best days, which

is why uh we don't want you to time the

market. So, that's it for now. Thank you

everyone.

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