"Wall Street Oracle" Optimistic Prediction: Fed Rate Cut Imminent, Tech Stocks Ready to Soar

According to the financial news app Zhitong Finance, Tom Lee, the co-founder and research director of the financial market research institution Fundstrat, known as the "Wall Street Oracle," remains optimistic about the stock market. Last week, he stated that the market rebounded quickly after experiencing "Black Monday," indicating that the market still has resilience. Lee is bullish on tech stocks, especially AI chip giants like NVIDIA (NVDA.US), expecting them to benefit from the Fed rate cuts.

It is understood that last month, Lee made an extremely optimistic prediction: by 2030, the S&P 500 index will nearly double. He predicted that the S&P 500 index would surpass 15,000 points by the end of this decade. The index closed near 5635 points last week.

Lee was one of the few bulls on Wall Street last year, and he accurately predicted the upward trend of the US stock market in 2023 at the end of 2022. Lee predicted at the end of 2022 that the S&P 500 index would surge by over 20% to 4750 points in 2023, and the index unexpectedly soared in 2023, ending up just over 30 points away from Lee's target.

"Black Monday"

Lee vividly remembers those three days of terrifying market conditions.

In early August, the Japanese Nikkei 225 index plummeted, marking the worst day since the 1987 stock market crash.

On August 22, Lee said in an interview: "After the Federal Open Market Committee (FOMC) meeting in the United States, the market experienced three days of panic selling, leading to Black Monday in Tokyo."

"It was heartbreaking," he said. "But we eventually saw it as a kind of economic growth panic, because we don't believe the US is entering a recession, and after the employment report was released, many people thought the US was in a recession."

On July 31, the Fed laid the groundwork for its first rate cut in four years, citing greater progress in reducing inflation and a cooling job market that no longer overheats the economy.

Nevertheless, the Fed kept its key rate unchanged at a 23-year high of 5.3%. Powell said that if inflation continues to decline, the Fed "may consider lowering policy rates" at the next meeting on September 17-18.

On August 23, Powell issued his strongest hint yet that the Fed is prepared to lower the benchmark interest rate.

Bright Prospects for Tech Stocks

"I think that due to the 'yen trend,' people perceive systemic risks, but the market has shown great resilience since then," Lee said. "What I mean is, the rapid rebound shows how strong this market is."

On August 23, Powell spoke at the Jackson Hole central bank symposium, regaining confidence that the US economy is ready for a soft landing, where inflation will ease but no recession will occur.

Minutes from the Fed's July policy meeting released on August 21 showed a clear shift in the Fed's focus to "full employment."

The minutes showed that "the vast majority" of Fed officials "believe that if data continues to align with expectations, it may be appropriate to ease policy at the next meeting." Lee said that the meeting minutes showed that Federal Reserve officials believed the labor market was strong, but the employment report and subsequent revisions "showed a large number of job losses."

The U.S. Bureau of Labor Statistics announced on August 21 that non-farm employment data was preliminarily revised downward by 818,000 people in the 12 months ending in March 2024.

Lee said, "The market is not as strong, I think this gives the Federal Reserve more ammunition to start a rate-cutting cycle, which will inject vitality into the economy and the market, especially for cyclical stocks and small-cap stocks."

The Russell 2000 index, which tracks small-cap stocks, rose 3% last Friday.

Lee said, "Tech stocks are in a favorable position," and artificial intelligence and AI chip giant NVIDIA "should strengthen this."

"The multiple is not high," he said. "Perhaps the expected P/E ratio is 28 times, which is not high for one of the most important companies in the world. So, if tech stocks are in a favorable position and the Fed cuts rates, I think this will expand the entire market."

NVIDIA will announce its second-quarter earnings on August 28.

Employment Market

Lee said that the likelihood of a soft landing in the U.S. is increasing, "which is why this should be a benign rate-cutting cycle," which is favorable for the market.

"But I think the key is for the Fed to get rid of its data dependence, because data dependence is what caused them to miss the inflation turn, and I think now they have missed the soft landing," he added.

Lee said that the futures market indicates more than two rate cuts, "so I think the Fed's actions may be a bit behind, we know that housing, durable goods, and auto sales are falling into recession, so this is causing a lot of pain for the market."

He said, "So, at least from the market's perspective, a more substantial rate cut actually makes sense."

Lee pointed out that the unemployment rate is largely influenced by the way the Fed communicates with CEOs, "because with monetary policy and real interest rates so tight, many companies are cautious."

He said, "This makes them unwilling to expand, so the employment market itself to some extent depends on the Fed's actions. Once the unemployment rate starts to rise, the situation will worsen."

Lee said that the rise in gold prices indicates that "there is still a lot of panic in the market," as "gold is almost a standard measure of bearish sentiment."

U.S. November Election

Regarding political issues, Lee said that the market believes that former U.S. President Donald Trump is more likely to defeat Vice President Kamala Harris in the November presidential election than what opinion polls show.

"I think, as the market becomes more convinced of this... you will see cyclical stocks, small-cap stocks, and Bitcoin perform better, because these are indeed clear policy divergences."

According to a report from the non-profit watchdog organization Public Citizen, nearly half of the corporate funds flowing into the election come from the cryptocurrency industry.

Trump said at a Bitcoin conference in Nashville last month that if he returns to the White House, he will ensure that the federal government never sells the Bitcoin it holds Lee added, "I think that in the past few days, the market seems to be betting on Trump's chances of winning higher than the poll results."