Stocks could be entering a powerful multi-year rally as hedge funds increase exposure and retail investors begin moving cash off the sidelines, according to Fundstrat Head of Research Tom Lee.
In a new CNBC interview, Lee says investors had turned cautious during the buildup of tensions with Iran, but sentiment has since improved as downside geopolitical risks appear more contained.
“I think investors got very cautious into the buildup of the war. Many stocks held by retail were getting hit, especially software stocks, and the Mag-7 had been falling. Investors viewed the start of the war as a time to take risk off the table, which was very different than what we saw a year ago when investors were buying into the terror flows.
Now I think the downside tail risks have been removed for the war. Hedge funds have been early and they’ve been adding risk, and we can confirm that from talking to our clients. I think now it’s retail investors that are beginning to take money off the sidelines and buy stocks.”
Lee says improving earnings estimates and the relative strength of the U.S. economy could continue attracting global capital into equities.
“I’d still be overweighting U.S. Because if you think about where innovation comes from, whether it’s in tech, healthcare or financial services or fintech, that’s really U.S. companies. There was an argument the U.S. P/E should derate, but the war has exposed that the U.S. multiple should be going up.
I think this is still going to be a very tricky year because we have a new Fed chair coming in, but once we’re through that, the next 18 to 24 months could be one of the best we’ve ever seen.”
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