Tom Lee sees stocks poised for gains as pessimism persists—CNBC interview

Fundstrat's Tom Lee sees “excessive pessimism” gripping markets and believes stocks are poised to surge higher, he told CNBC.

The head of research and chief investment officer at Fundstrat Capital pointed to an S&P 500 (SP500) that could climb as much as 9% before year-end, potentially reaching 8,200 to 8,400.

Lee argued that softer employment data suggests the Federal Reserve will be able to step back from its hawkish posture. Going into last week's jobs report, markets had priced in a maximum hawkish Fed with a 75% chance of an October rate hike, but the softer report changed that calculus.

With a September inflation reading due in two weeks and one-off factors rolling off, Lee expects softer inflation numbers over the next six months. That should allow bond yields to normalize, with the 10-year Treasury potentially falling below 5%, a level he said markets would interpret as "really positive for risk on."

The strategist made a compelling valuation case, noting that earnings growth is accelerating at a pace many would "find difficult to believe in their lifetime." Third-quarter earnings are expected to come in at nearly 30% growth, while 2027 EPS revisions have climbed more than 20% since the start of the year, outpacing the S&P 500's gains.

"The multiple actually has come down," Lee explained. "If someone is thinking the market was expensive at the start of the year, it's actually gotten cheaper."

While bullish, Lee acknowledged potential near-term turbulence. He identified the period from mid-October through the midterm elections as a window where a “speed bump” could occur. However, he views the midterms themselves as a clearing event that will likely trigger a risk-on signal regardless of outcome.

The market has already experienced a “rolling correction” since June 30, with various groups seeing drawdowns, and persistent bearish sentiment has prevented stocks from getting over their skis.

Looking at political implications, Lee argued that markets generally favor gridlock, so Democratic control of Congress would not necessarily be negative. He noted that AI stocks and crypto have stalled amid midterm uncertainty over concerns that Democrats oppose data centers and the Clarity Act.

However, Lee expects Democrats to ultimately support both initiatives after the elections, given the economic benefits data centers provide to communities and the bipartisan support the Clarity Act has received. "The AI stocks are going to benefit post midterms," he said, predicting the change in Congress would effectively "green light some projects."