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Fundstrat's Tom Lee: Tech equities could get rerated, they’re ‘unkillable’

Tom Lee, Fundstrat Global Advisors Managing Partner & Head of Research, joins Yahoo Finance’s Zack Guzman to break down his outlook on the market after better-than-expected weekly jobless claims data.

Video Transcript

ZACK GUZMAN: At the meantime, though, when we think about how the nation is grappling with all of this, it's not just happening in a vacuum. Of course, we continue to watch the debate between Republicans and Democrats playing out in Washington, DC. Let's not forget how big that could be if we get a deal.

And right now, talks not necessarily moving as fast as a lot of Americans would like, especially considering those extra unemployment benefits rolled off at the end of July. A lot of American now waiting to see what could come through in this fourth wave of stimulus, as well as investors trying to figure out how much stimulus will actually be there to meet the current economic impacts from the pandemic.

And here to chat that with us is our next guest. Tom Lee is Fundstrat Global Advisors Managing Partner and Head of Research, and he joins us once again. And, Tom, appreciate you taking the time to break all this down.

First, I just want to start with kind of where we're at right now in this recovery and what your take might be on how much longer it could take to get a deal through Washington. Obviously the market right now kind of trading sideways today, but what's your take on how the longer this drags on, the more it might endanger the recovery we've seen so far?

TOM LEE: Yes. Zack, it's good to see you and everyone there. Yeah, the economy is in rough shape. I mean, we're-- I mean, Emily just gave us a rundown of really bleak employment numbers. And even whatever jobs report we get, there's still millions of Americans out of work. So passing some sort of stimulus to kind of keep this economy tided over is hugely important.

So our policy strategist, Tom Block, thinks we will have something by August 14. You know, he thinks it's $1 and 1/2 to $2 trillion. You know, ultimately it does come down to the White House really stepping in because, you know, I think the White House is probably a lot more progressive and more liberal than the GOP at the moment.

ZACK GUZMAN: Yeah, and we heard from Senate majority leader there, Mitch McConnell, talking about not necessarily wanting to tie himself to the timeline of getting this deal done by the end of the week-- a lot of people were hopeful for that-- but was optimistic that a deal will eventually get done. Eventually, of course, could mean an eternity here when we're thinking about the timeline.

But interesting to see Goldman Sachs coming out and kind of-- of course, all of this right now and all the uncertainty is tied to the health front and whether or not we get a vaccine, where the case counts are going right now. But Goldman coming out and noting that investors might be overlooking the risk of a rotation here that could be sparked by a vaccine and what that could do for the rotation out of tech stocks into cyclical stocks.

Of course, that's been something that you've noted a few times on this show. You've talked about those hard-hit epicenter stocks. So what's your take on maybe them stealing your thunder here and talking about that rotation and how it could play out here in the back half of 2020?

TOM LEE: Yes. Well, I mean, I think it's-- I think Goldman's bringing a really important point, which is that, you know, the way forward for coronavirus in the US and the world is not just, you know, wearing masks and trying to eradicate the R0 to zero. It's that there can be some binary events. And, you know, one of the biggest ones is going to be a cure or a vaccine.

And let's face it, if we get a cure or vaccine, all the behavioral caution people have, the fact that they think, you know, they're bunkered, they're not going to come out of their homes, that's all going to change. That's going to drive a violent rotation into the cyclical stocks, which we call epicenter.

And epicenter stocks have gotten so cheap. They're almost as cheap as emerging-market equities. And if you think about it, I mean, you know, are US industrials deserving the same multiple as an EM cyclical? I mean, I think that's why epicenter has gotten ridiculously cheap, and so that's why it could be violent.

ZACK GUZMAN: Let's talk about those valuations too, though, because you talked about that last time you were on the show, specifically with tech, how they survived one of the worst economic downturns we've seen in our lifetimes, perhaps multiple lifetimes here when we think about the damage done, and they're still showing growth in terms of earnings. So, I mean, you talked about how it would be a reset in valuation there on the tech front.

And just putting that into context, you look at of P/E and what's being ascribed here to bonds and high-yield bonds there to Treasurys. I mean, put that into context for our viewers here when we think about why there might be more room to run on the valuations front when you look at it that way.

TOM LEE: Yes. Yeah, you're describing our work about how I think people are misplacing their fears about equity valuations, especially for the big-cap tech. Number one, these companies are unkillable. I mean, they grew in the midst of a depression, and they're forecast to grow earnings 30%. And they're trading at maybe 29, 30 times earnings.

A 10-year bond, which has no growth, is trading at 180 times. An investment-grade company, their bonds are trading at 52 times. Tech is a bond proxy. FAANG is a bond proxy. They're trading at over 30 times.

So I think tech equities as a bond proxy are super cheap. I think they're going to get rerated because they are unkillable, and they're-- you know, they're borrowing money at ridiculously low rates, so they deserve higher multiples.

ZACK GUZMAN: Yeah, you talk about that. We saw Google come out with a $10 billion raise at its lowest-ever borrowing cost there. The coupon rate for the $1 billion five-year tranche was 0.45% there, not that different than the yield we're seeing on the five-year US Treasury of 0.22%. So just kind of shows the ability for some of these tech giants to raise at incredibly low costs.

But when you think about it, people know the FAANG names. They know what the acronym stands for. But when we think about the epicenter stocks and you talk about the opportunity there and what these hard-hit names could show in the recovery, you've named some retail names there, cruise lines in there. Airline stocks have been in there. Casino stocks in there. What names are you looking at in terms of where the opportunity might be if these are where the market will be rotating into?

TOM LEE: Yeah, so something that we've been sort of thinking out loud is there's a lot of businesses that are impaired now because people don't feel safe. Going to a theme park, going to a concert, getting on a plane, getting on a cruise, going to a casino, these are going to be binary events because, unless you can substitute it-- remember, we have generations of people taking planes. It's not like we're going to stop flying or stop, you know, going to restaurants or getting on a cruise.

So names like Carnival, Wynn, Delta, Disney, Six Flags, you know, these are businesses that will come back in a ferocious way once we get a cure-- and even something like Live Nation, which does concert promotion and ticketing. So I think investors can't ignore these things.

Now, they're only 26% or so of the S&P, so it shouldn't be their whole portfolio. But at the end of the day, people are overweight growth. They're going to want to own some of these if we get a cure.

ZACK GUZMAN: Yeah, not to mention, I mean, you talk about Live Nation, one of those companies there that has been noted for having some pretty strong power in terms of control of the live-events market. Dare I say monopolistic power. I wouldn't go that far.

But, Tom Lee, when we also talk about the shift here-- because some of these things have seen a noted shift to online. Obviously you can't go online-- I guess you could try and create the concert experience online.

But when we think about other things, you've also highlighted research from McKinsey looking at how this shift to shopping online has impacted not just some of those things that we're used to, maybe things you might buy on Amazon but beyond that, groceries being impacted by all this, household supplies. You noted a few different categories that might mark a shift, and it might remain to be seen here when we think about if all of those go to new players and Amazon or if a Home Depot, for example, can shift some of those purchases that might be online from their stores online and still capture those dollars. But what's your take on how that might also be kind of a key element of 2020 and beyond?

TOM LEE: Yeah, that's right. I think there's going to be a lot of creative destruction, and the creative destruction is things that consumers have changed now because of coronavirus that are going to be hard to reverse. And I think we've already discovered consumers now are doing a lot more online, whether it's grocery-- now they're ordering in instead of going to restaurants. They're doing more cooking. And I think some of the other things are like they're moving out of the cities. I think urban dwelling is going to suffer a semi-permanent change because people are seeking a practical way to sort of be safer.

And so I think this is great for, you know, as you said, for the work-from-home companies. It's great for housing-related stuff like Tempur Pedic or Home Depot. But it remains to be seen, you know, how some of these restaurants can come back because, you know, if they've got a business model of in room-- of in dining and they've got compliance issues now and people starting to order in and cook, it's going to be tough to come back. So I think there are businesses that are going to be left by the wayside-- part of creative destruction, though.

ZACK GUZMAN: Yeah, and lastly before we let you go, obviously we've seen a few analysts come out and raise higher their year-end price targets here. You've been talking about this before a lot of that happened. So where are you thinking we might end up now as we sit pretty much back in the green here so far year to date?

TOM LEE: Yes, one of the things that we've used as our framework is the idea that the market is symmetric. So the faster you fall, the faster you recovery. That's one reason we were so optimistic about a big bounce is because we fell so quickly, and we should be making new highs before September.

I think given the unkillability and the fact that, you know, 75% the S&P is growth and they're getting rerated, I think the S&P easily takes out the all-time highs this year. And, you, know it's quite possible we see something, you know, much, much higher. But I-- you know, that being said, the future is uncertain, so I'm not going to say anything's guaranteed.

ZACK GUZMAN: Fair enough. Well, I appreciate you coming back on anyways. As you can see, Tom Lee is in his car dealing with a few different things here on the East Coast after that storm, but I appreciate you taking the time to chat with us and making it happen regardless of what nature throws at us.

Tom Lee there. Again, always appreciate you. Fundstrat Global Advisors managing partner and head of research, thanks again, my friend.