00:01:31 · S2, Ed Elson
[00:01:31] S2: The show goes on. The price of never watch the show sell. [00:01:37] S4: Welcome to Prof G Markets. I'm Ed Elson. It is November 4. Let's check-in on yesterday's market vitals. The S and P five hundred and the Nasdaq bounced from the previous day's sell off. Meanwhile, Apple shares weighed down the Dow. More on that in a bit. Brent crude declined, and finally, the yield on ten year treasuries rose after job openings hit a four month high. Okay. What else is happening? The Nasdaq one hundred hit correction territory this week, dropping 10% from its October peak. October was also its worst month since March of last year with pain from the neo clouds and big tech weighing on the index. It appeared for a moment that the AI trade could be starting to unwind. Yesterday, however, the Nasdaq climbed nearly 1%, a sign that tech investors might be putting their worries behind them. Meanwhile, Tuesday marked an important milestone for US investors, of course, the midterms. We are recording this before the results are in, but we still wanted to check-in with one of our frequent guests on what he thinks the final stretch of the year will look like for the market. So joining us is Tom Lee, cofounder, managing partner, and head of research at Fundstrat Global Advisors. Tom, good to see you. I wanna start with the Nasdaq correction more than 10% off its record in October. Just a lot of pain and a lot of the biggest names in AI. What do you make of this correction? Do you think that we will see more pain ahead?
00:03:12 · Tom Lee
[00:03:12] S5: The market's been climbing a wall of worry for the past few weeks. One part, of course, is the war and oil and the inflation it's pushing through the pipeline. The second is this buildup of concerns around AI funding and debt and, you know, are we in a bubble? And the third is some election uncertainties and the idea that if the midterms result in a democratic sweep, this will result in potentially a wave of anti AI legislation. So I think investors have been worried, it pushed us, like you said, into an 11% correction. I think it's very similar to the setup we had after the situational awareness collapse, where the Nasdaq fell 12%. In fact, the market's in the same oversold position. I think we're now in a position where the bottom is very likely in, and that situational awareness sell off was followed by a 15% rally. I think the tech... Technology, you know, the triple q, is gonna do at least a 15% rally between now and year end.
00:04:23 · Ed Elson
[00:04:23] S4: Why does this... And we'll return to your expectation and your prediction. But why does this keep happening? I mean, it's true. We... Like, this does feel like deja vu. And then in the other sense that it that it feels like we're repeating history is, you know, you've got the Nasdaq down 10% in the past month, and then you've got this rotation into all of these non AI stocks, which is why the equal weight is up more than 4%. And so you look at the overall stock market, and, you know, if you were to just look at the AI names, you'd think that it's chaos. But the S and P has not been hit that hard. We're still up, you know, more than 10% year to date. So it almost feels like we keep on thinking that a correction is about to occur. It does occur, but then it seems to be a lot less problematic than a lot of people expected. Why do you think this is happening? What are some of the dynamics that go into that?
00:05:18 · Tom Lee
[00:05:18] S5: I think a lot of this is behavioral economics at work as well as mechanical. Let me just start with the mechanical. I I think that there, as you know, has been a... An explosion of zero day trading options, so short term uses of leverage. I mean, that's basically the same as margin trading. It's, you know, it's a highly levered bet, and therefore, investors are employing a very myopic time frame. They are not thinking about the next twelve months. They're probably thinking about the next month, really probably the next two weeks. And for the professional investor, the institutional investment world, which is still half of trading volumes, they have to respond to that. So I think the market has now become very short term oriented. That's why quarterly earnings seem like long term because someone's gonna be like, woah, that's not for another ninety days. But the behavioral economics at work, I think, is that the world has faced seven black swans in just the last six years. COVID, the inflation cycle, the fastest Fed hikes in history, The US bombing Iran, declaring war in Iran, these tariff wars, on top of the GFC, which wasn't that long ago, and the Internet bubble. And so I think there's a lot of pattern matching that people say, oh, well, we have another bubble in the making. This time it's AI, and a lot of people miss the AI trade. The ones who've missed it are the ones that are most declarative that this is a bubble.
00:06:50 · Ed Elson
[00:06:50] S4: What do you make of of the AI bubble concerns? Because, I mean, the way I look at it, there are some pretty clear signs of bubbleicious behavior like circular financing. Yeah. I think that's probably the most important one. A lot of the sort of reinvestment in other companies, We're seeing some of those signs and of course just, you know, a lot of expectation riding out into the future about the AI build out, which we're not really certain of. But at the same time, investors do seem to be quite cautious, which is why we're seeing it reflected in the multiples and reflected in this correction right now. I mean, what do you make of the AI bubble at this point? Do you think that it is... Do you think that it exists? If not, why not? And and if so, what are the dynamics going into it?
00:07:43 · Tom Lee
[00:07:43] S5: I've witnessed several bubbles, you know, because I've been covering markets since the early nineties. And the two that people would describe as bona fide bubbles are the Internet bubble and the housing bubble. I mean, those are genuine bubbles. And it's hard to compare the current cycle to either at this moment because, you know, the Internet bubble was apparent because the the type of innovation that was taking place was simply cost savings. The Internet in... Into 1999 was not a revenue story. It was a brick and mortar to etailer model. It was trying to basically say, this is a new way to do it, but you could save money. And the housing bubble, of course, brought leverage and capital into the hands of unqualified holders. So it was basically a bubble where money was... Debt was given to people, and then a lot of people borrowed a lot of money. This AI story so far is one of pretty remarkable innovation taking place, like otherworldly innovation. And so I think as long as that pace of innovation is happening, and then we're seeing it as productivity for businesses because revenue per worker is going up. There was no productivity metric in the Internet we could point to at all at any time into '99. I think AI becomes a bubble when we start making up use cases that don't actually have end markets yet. As far as circular financing goes, and I know people are making claims that that's the reason it's a bubble, I think it's a people do need to be students of history. There are many cases where circular financing is not called circular financing. It's really ecosystem development. Some examples are, of course, the energy industry is... Then would be notorious for circular financing, but that is the nature of resources. Another example is the early days of of radio. RCA made radios, Then they had to actually create radio stations across the country. Then they had to invest in programming across the country. And imagine if someone said radio was a bubble because RCA is investing in radio stations and in in radio programming, they were creating an industry. And that was not... It would have been a huge mistake because RCA was probably the biggest stock of its time until the nineteen twenty nine crash, which was not a a radio bubble. It was just basically a stock market bubble. So I think, you know, it was more than a 100 x move.