The market should recover its poise within the next few days, says Fundstrat's Tom Lee.
It paid to be patient with Cisco stock in the late 90's
Anyone taking a cursory glance at Monday's market may believe it was a dull day. After all, the S&P 500 closed up just 0.02%, leaving the Wall Street benchmark only 2.6% below its record high hit at the start of June.
But for many investors it's a painful time as the uber popular semiconductor sector takes a battering. For example, memory-chip makers Micron Technology $(MU)$ and Sandisk $(SNDK)$ at the start of the week added to recent falls that left them down 22% and 44% over the past month.
However, Tom Lee, the usually bullish head of research at Fundstrat, thinks the choppy pattern the S&P 500 has witnessed over the past week is going "to end in the next day or so," and that the market will end July higher than it is now.
An important cause of the market's recent vacillations has been the surge in oil prices amid growing fears about an escalation in the U.S.-Iran war, according to Lee. The bump in energy costs pushed up Treasury yields as traders worried about inflation.
"But we got a stand down, and as you can see, oil has since fallen $10. Yields have actually dropped by almost half of the [recent] rise, and you can see the odds of the U.S. invading Iran have dropped to 25%. So that's good news," Lee says in a video update released late Monday.
Those inflation concerns dovetail with another factor that Lee thinks has rattled the market in recent sessions: the possibility of the Federal Reserve raising interest rates on Wednesday. He notes that the probability of a 25 basis point rate increase are at 27% in the prediction markets and 38% in Fed futures - a big increase from where they were just three months ago.
"But keep in mind that this is a binary event," says Lee. "Markets can't find equilibrium on a binary event, so someone may be hedging. I just think the odds of a hike are very low."
Next, Lee addresses the sell-off in semiconductors and memory stocks. The fear in the market is that the pullback simply reflects more investors looking to call the top on the artificial-intelligence trade.
But Lee argues the latest slide has been triggered by specific news, such as some Chinese chip makers reportedly making machines that compete with ASML $(ASML)$, and Nvidia's (NVDA) announcement it will guarantee $250 billion for a data center project by OpenAI, a move that raises circular spending concerns.
Lee also asserts that the recent poor reactions to technology earning beats don't reflect that profit prospects are priced in, but that the broader market is just enduring a period of nervousness.
Another reason for the slip in semiconductors is that investors may simply be positioning for August, and looking to buy software stocks and short semis, a rotation trade that's been a feature of markets for a while now. "Mag 7, software and even crypto have been actually recovering," Lee observes.
To illustrate why investors should not get rattled by some of the sharp pullbacks in many AI plays, Lee uses the example of Cisco Systems $(CSCO)$, the darling of the internet boom, from 1994 to 2000.
Cisco went from 80 cents to $9 by 1997, and then it fell 40%, Lee notes. "You might've been nervous back then thinking that was the top, but a year later, it went to $18," he says. Cisco then fell 41% again to $9 in 1998, but two years later it was at $80.
"So you had a 100x move. I think that's what's going to happen here with the AI trade, and I think we're kind of here today." Lee says. He adds that investors should remember the saying of the late Charlie Munger, longtime vice chairman of Warren Buffett's Berkshire Hathaway: "The big money is not in the buying and selling, but in the waiting."
"We continue to buy the dip, and keep in mind, this is the most hated V-shaped rally," Lee concludes.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are mixed as Treasury yields BX:TMUBMUSD10Y slip. The dollar index DXY is a tad lower, as oil futures (CL.1) fall and gold futures (GC00) trade around $4,045 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7413.18 -0.40% -0.37% 8.29% 16.02% Nasdaq Composite 24,932.08 -2.26% -3.44% 7.27% 17.72% 10-year Treasury 4.621 -0.80 15.20 44.90 29.50 Gold 4042.2 -0.98% 0.51% -6.69% 21.55% Oil 80.57 -4.70% 15.05% 40.34% 16.35% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
Federal Reserve officials on Tuesday begin their two-day policy meeting, with President Donald Trump again saying they should lower interest rates.
PayPal (PYPL), Boeing $(BA)$, Coca-Cola $(KO)$, and UPS $(UPS)$ release earnings in the morning.
Visa (V), Ford Moto $(F)$ and Seagate Technology $(STX)$ are among the companies reporting results after the closing bell.
U.S. economic data due Tuesday include the advanced trade balance in goods for June, released at 8:30 a.m. Eastern, alongside advance retail and wholesale inventories for June.
The U.S. consumer confidence report for July will be released at 10:00 a.m.
Meta is fighting a mountain of social-media lawsuits-at just the wrong time.
The chart
Daily retail net buying of single stocks remains at its lowest level since 2020, according to Vanda Research, with the 21-day average sitting well below recent norms. However, they add: "Importantly, total turnover (buying + selling) remains around the 98th percentile of history, suggesting retail are still highly active - they're simply trading much more two-way."
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia SPCX SpaceX TSLA Tesla MU Micron Technology TSM Taiwan Semiconductor Manufacturing AAPL Apple AMD Advanced Micro Devices SNDK Sandisk AMZN Amazon MSFT Microsoft
China finds world's oldest amber.
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