Fundstrat's Tom Lee. Cindy Ord/Getty Images
Fundstrat's Tom Lee said that mega-cap tech stocks could continue to rise despite rising interest rates. He spoke to CNBC Friday.
This thinking is contrary to the impulse selling seen in tech stocks when interest rates rise.
Lee believes investors can also rest assured as he doesn’t see runaway inflation in the US.
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According to Fundstrat's Friday interview with CNBC, Tom Lee said that two of the most serious stock market risks currently threatening investors don't concern him.
Due to supply-chain disruptions caused by the COVID-19 pandemic, and rising wage pressures, inflation has been on the increase. Core inflation increased 3.6% in August. This is the largest year-over-year increase in over 30 years.
Investors are now concerned that rising inflation may not be as temporary as Fed Chairman Jerome Powell might think.
Inflation increases interest rates. This led to a sharp sell-off of mega-cap stocks after the 10-Year US Treasury yield rose to its highest level in over three months.
Lee acknowledges that runaway inflation will drive the stock market lower. Lee doesn't seem to be bothered by the possibility of runaway inflation, and its impact on tech stocks via rising interest rate rises.
Lee doesn't believe wage growth is stable. He said that while job turnover is increasing across many industries, wage growth will not be as high in the future due to shortages.
When forecasting future inflation, it is important to take into account population growth. The US is currently in a stalling state, with 2020's population growth the slowest since before the Great Depression.
The biggest risk is if the US population grew faster. This would anchor rising wage expectations. It has never been a country that has experienced slow population growth and sustained inflation. Lee said that it's because people believe [inflation] to be purely a monetary phenomenon.
Lee said that investors are more worried about inflation risk than they are about actual realized risks.
Stock market outlook: Still bullish on S&P 500, FAANG
Lee stated that rising interest rates are not yet a threat to the current bull market run of the S&P 500 because they remain at historically low levels.
He predicted that ten-year Treasury yields between 1.5% and 2% won't be a burden on homeowners, companies, or individuals with debt. They won't also not hold back stockholders.
Lee stated that while a rise in interest rates can often lead to a sharp sell-off of high-growth tech stocks, a continuing move higher in rates won’t stop tech stocks powering the S&P 500 towards his year-end target price of 4,700. This represents potential upside of 9% since Thursday's close.
"The fundamental question will be whether FAANG margins are at risk due to rising interest rates. Rates rising could cause operating margins to rise, but FAANG's relative performance in periods of inflation is actually quite good," Lee stated, citing internal research.
Lee stated that FAANG trades are not as crowded as they were last year during the stay at home stock boom. This means that they can rally strong into the year's end.
Lee stated that the current stock market sell-off of 5% is "just an squiggle" and will look nothing in 12 years.
