- Mega-cap tech
stocks can continue their rise even amid rising interest rates,Fundstrat 'sTom Lee told CNBC on Friday. - That line of thinking is contrarian to the often impulse sell-off seen in tech stocks whenever interest rates move higher.
- Lee also thinks investors can rest easy as he doesn't see runaway inflation unfolding in the US.
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Two of the biggest
Inflation has been on the rise amid supply-chain disruptions from the COVID-19 pandemic and increasing wage pressures. Core inflation rose 3.6% in August, representing the biggest year-over-year jump in more than 30 years.
That's leading some investors to worry that rising inflation is not as transitory as Fed Chairman Jerome Powell may think.
Higher inflation puts upward pressure on interest rates, which sparked a steep sell-off in mega-cap stocks this week after the 10-Year US Treasury yield jumped to the the highest level in more than three months.
Lee admits runaway inflation would reprice the stock market lower. But the fear of it actually happening - and then hitting tech stocks via rising interest rates - isn't fazing him.
That's because Lee doesn't think wage growth is sticky. Job turnover is picking up across many industries, and wage growth may be high now due to shortages but won't be at those same rates in a few years, he said.
Population growth is another important factor to consider when forecasting future inflation. And right now, the US is stalling, with 2020's population gain the slowest since the Great Depression.
"The biggest risk would be if the US population was growing faster, because that's how you anchor increasing wage expectations. There really hasn't been any country with slow population growth that has had sustained inflation. It's one of those misconceptions because people think [inflation] is purely a monetary phenomenon," Lee explained.
"I think investors have more anxiety about inflation risks than the actual realized risks will be," Lee added.
Stock market outlook : still bullish on S&P 500, FAANG
Rising interest rates don't yet pose a threat to the S&P 500's current bull market run because they are still sitting at historically low levels, Lee said.
Ten-year Treasury yields of 1.5%-2% won't burden companies, homeowners, or people with debt, and won't hold back stockholders, he predicted.
And while a spike in interest rates has often led to a steep sell-off in high-growth technology stocks, Lee said a continued move higher in rates won't stop tech stocks from powering the S&P 500 to his year-end price target of 4,700, representing potential upside of 9% from Thursday's close.
"The fundamental question is going to be are FAANG margins at risk because [interest] rates rise? Operating margins could actually rise if rates are rising, and FAANG's relative performance during periods of inflation is actually pretty good," Lee explained, citing internal research.
And because FAANG is not as crowded a trade as it was last year during the stay-at-home stock boom, they can still rally strongly into the end of the year, Lee said.
The current 5% sell-off in the stock market is "just a squiggle, and as we zoom out it's going to look like nothing in 12 months," Lee concluded.