You now see the S&P hitting 8,000 by the end of the year, but with this caveat, which I find interesting, that you think that the S&P in the fall, that the markets are going to hit something that resembles a bear market and then come ripping back up.
Yeah, we did raise our target to 8,000. But June to December, I think a lot of tests the market has to pass are going to be coming. And you know, as you know, corrections, once they start, they can be very, very ugly.
Why do you believe that it'll come ripping back so quickly?
I think what I've realized is markets frontload negative shocks. So that's why I think we could have a very severe correction, but unless the economy is breaking, so we actually have a negative cycle.
Today's number, 70. That's a percentage increase in US adults who listen to podcasts weekly compared to 2022. Ed, I've had several people tell me that Michael Cembalest, the chief investment officer of JP Morgan, put in a note, a research note, that he's upset about a vulgar joke I made at the beginning of the podcast that he was a guest on. Michael, we apologize. So, we are going to have the Michael Cembalest dad joke, and that is until I hear from you and that you have accepted my apology, I'm just going to do dad jokes. Okay. So, you ready, Ed?
I love it. Yeah. Michael Cembalest's dad joke. Let's hear it.
What do you call a fake noodle?
An impasta.
Michael, we love you. Don't be angry at us. Reach out. Reach out. Forgiveness is a wonderful thing, Michael.
I love it. Should we get into our talk today? We have a very interesting conversation with Tom Lee, one of our favorites, the what-could-go-right Tom Lee. I love Tom.
Let's get into it. At the end of last year, one guest came on the show and laid out a notably bullish case for 2026. Fast forward to today, and the US stock market has indeed performed very well, up nearly 9% year to date, but a number of big question marks still loom over the market. So now that the first half of the year is in the books, we wanted to check back in with that guest and find out: is he still bullish? What are investors underestimating? And where are markets headed for the second half? So to find out all of this, we are speaking with Tom Lee, co-founder, managing partner, and head of research at Fundstrat Global Advisors. Tom, great to have you on the show. We wanted to get your H1 review and then your kind of outlook for H2, just to sort of set the stage here. We've got the S&P up nearly 9% in the first half, the Dow up 8%, the Nasdaq up 11%. There are certainly some winners and losers among them. You know, you look at the Mag Seven, big tech, which has been kind of punished so far this year. Also crypto, which we'll get into in a moment. But let's just start with your reflections on the first half of the year so far.
2026 is tracking to be the fourth year of double-digit gains. It may surprise viewers, but when markets post three years of strong gains, which we've seen, 2023, 2024, 2025, the fourth year actually tends to be pretty solid. That was one reason we were constructive. And at the start of this year, the thought was that earnings could be the driver of the markets. And that's been the case because at the start of this year, 2027 S&P earnings consensus, and very similar to ours, was $350, and now it's currently $400. So it's risen by $50, and the PE on 2027 earnings was at 19.4 at the start of the year. It's now at 18.4. So, the stock market, which might surprise people, has actually gotten cheaper now than it was in January, even though we're 9% higher. I think it makes a lot of sense to be constructive here, because I do think there's room for earnings to further revise higher for the US. The drivers of earnings have remained in place. You know, part of it is this AI and energy infrastructure build that's taking place. Part of it is this trend towards onshoring, and of course there's still some residual infrastructure spending by the government. So those are all tailwinds to spending, and I think for the most part, investor sentiment has not become a bull market, but there are two sort of other factors to weigh in now that we're mid-year. One is that margin debt is much, much higher now than it was at the start of the year. In fact, it's risen 55% year-over-year. That is, I think, the fifth highest year-over-year increase ever in almost 70 years. And historically, that's associated with that cohort of traders, you know, that borrow money, running out of firepower. But on the flip side, when we look at fund manager performance this year, looking at large-cap growth, 76% of fund managers are trailing their benchmark this year, which is a pretty historic number. On large-cap blend, 60%, which is not as historic. So today, I would say growth managers probably missed a lot of that semi and DRAM rally. I think they're going to be chasing it in the second half, which is why I would probably stay bullish.
I'm anxious about this market in a lot of ways, because I look at, you know, the Shiller PE as an example, which is extremely high right now, basically coming up on dot-com territory. And I guess there's a distinction between the forward earnings and the trailing earnings that I'm starting to feel is important, and that is a lot of these earnings that we're seeing, they hinge on these contracts with these AI companies whose ability to actually pay out on those contracts, I think it's not unreasonable to say that they should be at least questioned. OpenAI and their spending plans, Anthropic and their spending plans, SpaceX, etc. And so, and at the same time, we've also been looking at some of this research that was coming out recently that Goldman actually confirmed, which is that a lot of the earnings that we're seeing, especially from big tech companies, a lot of those earnings reflect the increase in their stakes in their private investments in AI companies, and that is being reflected in the actual earnings themselves because of these accounting standards. Point being, I look at the earnings growth. The earnings growth is really strong, but I feel a little bit ambivalent about it, especially when they say earnings over the next 12 months are going to be XYZ. I'd just be interested to hear your views on my, I guess, skepticism.
I'm going to agree because I think you're raising questions about quality of earnings. You know, I guess there's a few things that would make me question quality of earnings. You know, one is balance sheet gains from investments aren't the same as operating earnings. I think there's a second difference, which is that there is an element of pricing taking place because, for instance, you know, in the supply chain for chips, there's companies that can't increase fab production or there's a long lead time, so they can take price instead. So now you're going to get more flow through to the bottom line, but that creates the bullwhip effect because we know ultimately the supply chain catches up. And then there is concentrated spenders because we know hyperscalers are writing big checks, and now they're asking equity markets to fund that. That's why Google has their ATM, and that's why we're seeing Meta potentially do that, and of course, you know, SpaceX's IPO. These are all efforts to raise the money from the public markets. And then lastly is that there's consumption of credit taking place. So now we're tapping into another part of the capital structure to fund that. So I think those are all appropriate reasons to be sort of raising the bar on how much multiple you apply to the earnings growth. That being said, I think a lot of the activity is mainly taking place in four countries. And so we have to really think about what that means. You know, the four countries, of course, are the United States and China, and then it's, I'd kind of say Korea/Taiwan, so the AI infrastructure partners, and then possibly like Japan. So, the story that's unfolding, as much as we might be skeptical, really is one where AI is clearly only benefiting a handful of countries.
So, when you look at the Shiller PE, for example, I mean, the real question for us right now is, is it frothy? And it almost seems like there's not a lot of agreement on this point right now, which is interesting, that we're all kind of looking at different metrics and we're all trying to determine, is it really bubbleicious, is it really frothy, or is it not? What is your view on that point? Because I think the quality of earnings probably has a role to play in that conversation.
One thing that we've done in the past, when I was at JP Morgan, then we continue to maintain at Fundstrat, is, you know, you can run a Shiller PE by sector, and that way it kind of more is apples to apples. Like, for instance, if you did tech Shiller PE, then you can sort of judge it 1929 versus now. Of course, what is a technology company back then is very different because, you know, that was radio makers and microwave ovens at some point. But by that measurement, the Shiller PE is not nearly as extended just because the composition of earnings now today is increasingly coming from tech. So tech is probably, I'm sorry, I don't have the exact numbers, but I think it's going to be 60 or 70% of all earnings growth, but it's probably close to 40% of the level of earnings. And in '99, that wasn't true. You know, tech wasn't a big earnings contributor in '99, but it was a big multiple contributor. So I think that compositionally, and the ISM is showing you the same thing if you do the split between manufacturing and services. We've flipped just in the last 50 years from manufacturing being the majority of activity to only 30%. So I think we have room for the Shiller PE to be higher. But a fair question I would add to what you're saying is, like, is credit spreads, you know, is credit underpricing risk? Because, you know, the 10-year's been going up, and I've been surprised at how tight high-yield spreads have remained and investment grade. You'd think that with geopolitical risks and the high level of rates that is creating a cost of capital burden, that spreads should widen, but they haven't. And, you know, it could, I mean, to me, I'd be watching credit before I watched equities crack, but I think credit is probably telling us there's actually still too much liquidity out there.
It feels like there's contradictory forces or narratives around the impact or second-order effects of some of these big IPOs. And one of the themes I've seen is that it'll soak up a lot of the market or a lot of the capital out there for IPOs. And the other narrative I've seen is that it'll be very constructive for IPOs because it's sort of saying the IPO window is open again. Hey, what are your thoughts on that? What do you see as the second-order effects of some of these bigger IPOs coming down the pipeline?
I think there are like sort of three cohorts being affected by IPOs. You know, one is the issuer. The second is the holders of the private companies of these IPOs. And the third is, you know, sort of the broader market. And SpaceX, you know, is a good example. Their IPO was only 75 billion of a $1.5 trillion company, or over one and a half trillion. So today, the float's only 90 billion. SpaceX as a stock is trading less market cap than most of the Nasdaq 100. You know, it's probably Nasdaq, it's top 50 in terms of total market cap, and that's why it's trading well. But those shares are going to unlock in phases, but by the end of the year, over a trillion should be available. I think that for the public and for the general market, that is a lot of supply. I think the supply effect of SpaceX is going to be as we get to the end of this year. But before that happens, there's massive wealth created because SpaceX only raised 18 billion in its entire history, and it turned into 1.5 trillion. So the holders of SpaceX when it was private have enormous wealth created that actually is going to be true economic stimulation because every bank will lend the money against their holdings, and so I think it actually boosts GDP. So you're right, Scott, there's counterbalancing forces. My take is that the broad economy is going to benefit from all these IPOs because it's massive wealth and liquidity. The stock market will do well until the unlocks happen, because at that point, when the unlocks happen, you have to absorb all that supply, and the issuers are going to do very well because now they have a way to tap public money and to raise and maybe accelerate spending. So I think issuers will benefit from their IPOs.
Let's stick on this notion of capex and our second-order effects of specifically of these AI companies who've made these extraordinary commitments around capex, which I believe has elevated a lot of these stocks. And I'll put forward a thesis. It looks like OpenAI might be shelving its IPO. I got to think that that means the momentum is shifted or the growth expectations aren't living up to expectation. Do you have any fear that we are starting to see some cracks in the, I don't want to call it the AI bubble, but in the AI story, and that would ripple through the markets, or are you less worried?
Well, there's a lot of things that can go wrong with the AI story, Scott, and because one, as you know, we have to build a parallel amount of power and infrastructure to support all this. Getting all that built is an enormous lift. I mean, you know, we won't even really know what it means for residential electricity prices, right? Or like environmental damage, you know, or like quality of life if you live around a hyperscaler data center. And I think that we don't exactly know why both Anthropic and OpenAI delayed their IPOs. I think that's actually very curious because both would benefit from one going public first. Nobody would want to be last, you know. I think it's possible it has to do with the US government throttling new models, right? Because, you know, like Mythos faced a lot of like, you know, scrutiny, and then Fable had to get pulled. You know, is it possible the US government is actually saying like, we got to like look at all your models now? And then they got to like throttle their plans maybe. I don't know. I mean, but to me, it's curious. I actually think SpaceX is a huge success. So I don't think SpaceX has anything to do with OpenAI and Anthropic's IPOs.
We'll be right back after the break. And if you're enjoying the show so far, tune in on Sunday for our founder series. We'll be speaking with Andrew Dudum, the CEO and co-founder of Hims & Hers.
We're back with Prof G Markets. I mean, just to push on this idea of like, why is OpenAI not going public? Why are they worried? What are they anxious about? I'd like to get your views on this. I mean, it seems as though from a financial perspective, OpenAI is in a little bit of a shitty spot. I mean, just to put it plainly from their profitability side. I mean, just the fact that last year they lost, you know, almost $40 billion. If you look at like the operating profitability, they lost around $21 billion last year. What we know about AI at this point is that the revenues, the growth is tremendous. Usage is growing as well, but they're incredibly expensive to both run these models and also to train these models. And we haven't seen that the AI business is actually a profitable business yet. It's still sort of in the test phase. And so I wonder if OpenAI, I mean, we saw that their financials were leaked recently. The reaction was a little bit not great. Just on an anecdotal basis, I thought the financials were surprisingly bad from a profitability perspective, and I wonder if they're just like, investors can't handle this, and we need to figure our business out before we go out. And I'd just be curious to hear if maybe that, if you think that might have played into it, and also what you think of these businesses themselves, the fact that we have so much riding on these companies and yet they haven't figured out their business models.
Okay. Well, I'm just going to speak my opinion because I don't really have the full facts. I think if OpenAI was to go public or Anthropic, their IPOs would be very, very successful. And the reason being is that their stories are pretty straightforward to understand. You know, they're not a conglomerate. OpenAI and Anthropic are clearly at the forefront of like creating complex reasoning models that are eventually going to become our agents for us. And the public has no access to it. Institutional investors don't really have access. I think that their ability to raise money in the private market is still not a problem. You know, I think that they've had no problem raising tens of billions of dollars. So it's probably one reason that they are pausing. But I mean, again, I'd say it's curious to me. But I think investors, when they look at OpenAI and Anthropic, aren't looking at this as a subscription business, and you know, they need to see free cash flow. I think they need to see a company willing to spend and recruit to maintain leadership, because they are two very unique businesses. But again, I'm not an insider, so I don't know.
Do you, as an investor, like that story personally? This is the thing that I'm trying to figure out because I think I'm with you. I think, you know, AI is, you know, it's such an important moment for the markets, and these are the two leaders. And if it's on the table, why wouldn't you go for it? But I do think that the business model question is still a giant unanswered question. I'd be curious to hear how you view it personally.
This is still a story that's going, it's being written in the future tense. Like we're only chapter one at best. We can make guesses, analogies. I mean, for instance, not to fork the conversation, but to me, SpaceX is the most significant achievement they did is they turned satellite spectrum, right? SpaceX entirely runs on satellite spectrum, Starlink, and in their future that was worth pennies compared to terrestrial spectrum, and they made it the most valuable spectrum in the world. Like Elon was able to get all the global spectrum for like nothing. Whereas in the US today, it's like to get, you know, 20 megahertz wide of cellular, you're paying $200 per person. I mean, that's a... So he took satellite spectrum for nothing, and now it's the most valuable spectrum in the world. Meta took a free business with user-generated content, which was originally just sort of like a yearbook for people, and they turned it into one of the biggest monetization businesses ever. And I remembered when Meta launched the mobile business, people didn't think there was anything to how could Facebook be even better on a mobile because, you know, there was so much richness on the desktop version. But that was the key to them stealing the advertising business. OpenAI and Anthropic, with because of their creation of basically complex reasoning models, who knows what kind of industry they're going to subsume? Like we think maybe it's just advertising. Maybe we're oversimplifying what their actual business model is. Like, are they going to be creating biotech labs, you know, of the future, or are they going to create workforces? I think it's a sort of a story to be told. But I would say when I look at the most valuable companies like Meta and what they achieved, or even Google, which took search, right, they really took search to a much different level, and SpaceX taking satellite spectrum. I think that's why there's a not-zero chance that these could be massive home runs as IPOs still.
100% agree with you, and I think it's, I'm glad you bring it up. Do you think though that the risk of them, of OpenAI as an example, not working, that they don't make that home run, that something goes wrong, Sam Altman makes the wrong move, and they crash and burn in some way? Part of my view is I feel like that's also a non-zero probability that ought to be priced in, not just in terms of the price of OpenAI, but also in the price of the markets at large, which have become so dependent in a lot of ways on OpenAI succeeding and also OpenAI spending lots and lots of money and paying for all of this compute and all of these chips.
Well, there's an interesting irony because the more successful OpenAI becomes, two things are apparent. The more important Sam Altman is, because it is really him having to, as a human, make decisions. You know, like I'm sure he's not typing into ChatGPT like, what should I do next, right? Yeah, it might be. But the self-actualization of like his strategy requires highly, highly skilled humans, you know. So like it's very much a people's story to make both amazing companies. And you're right. So you're betting on Sam and his vision, and you're betting on Anthropic's team and their vision. And you know, it is a two-horse race there, and they both could be successful too if they fork in different directions.
That bet is the thing that makes me anxious about this market, that a lot is riding on him and his ability to execute and to make the AI story actually work. And if it doesn't, it seems to me that the S&P, which has risen nearly 9% this year, most of that growth is coming from a handful of companies, not the big tech companies, but the semis and the DRAM companies, the memory companies, all of the sort of chips and shovel stocks that are fueling this AI boom. If that story doesn't work out, if things don't work out the way that we'd hoped, it seems as though you're going to see a very, very significant and violent shift to the downside. But it hasn't happened yet, and the story continues to roll on. I just, I assume that's on your radar.
I think one thing though we should keep in mind is that we're sort of maybe speaking in a narrative sense because, you know, even as important as OpenAI is and Anthropic, if they were to, let's say, stumble here, I think S&P earnings wouldn't fall that much short of the 400, you know. But we also have to keep in mind that like one, there's actually one person that in every point in history since the 1940s is like the most important person's hand on the market, which is the Fed. Like the Federal Reserve chairman is a single person. Like that's big key man risk. And you know, it's been amazing because, you know, we've never really had a Fed chairman suddenly like be incapacitated from their job. You know, I mean, I think that's a miracle of capitalism because like, you know, Kevin Warsh today is actually arguably one of the most important people in the world. Now, I'd agree with you. There's fragility. I mean, the market is, you know, S&P here at 7,300, it, you know, I just remembered in 2009, the market bottomed in the 600s. So, you know, I mean, it's definitely come a long way, but fortunately, the multiple is lower today than it was in 2009. But you're right. It's, you know, what's very different is the US economy suddenly is growing faster for everything you've described, which is because of AI. And that's really, you know, the reason we can be both comforted because it's really happening mostly in a few countries, but then we can be very worried because you're right, it's creating path dependency on, you know, on a handful of people.
Yeah. Yeah, it's almost like the question becomes, what do you want to do about that fragility? Do you decide because it's fragile, oh, I'm out? Or do you recognize at the same time, yeah, there is home run opportunity as you mentioned, and do I want to miss out on that? It's kind of the big question. I'll pass it over to Scott, and then we'll get into some of your predictions for the second half of the year.
So Tom, you've said that AI is creating a productivity boom, and we have seen an uptick in productivity, and not just a technology boom. What industries do you think benefit most from that increase in productivity?
It's one of the things that is fairly hard to measure explicitly because I think that what AI has proven is a couple of things. You know, one, and I'm being anecdotal, but one is, of course, it makes people, a lot more people who are highly capable, very productive, because I've seen that at Fundstrat.
Capital and Fundstrat, where we are deploying essentially an army of researchers, but it's really just our cloud agents. And but it's also revealing the nature of work, because most people say, 'Hey, this is a 40-hour week job.' And from an economic standpoint, when we measure it economically, we say, 'Oh, you work 36 hours,' or you know, we have like because they punched a clock or you know, a 40-hour week. But we know that most people in that 40 hours probably only work x% of the time. You know, what is the actual time people are productive? Is it six out of the 40 hours a week? You know, it's possible. And most of the other time people are just searching and eating lunch and, you know, doing other things. So what AI has done is it's helped fill in all that blank space and created work. Um, and so I guess that's productivity.
I believe a lot of white-collar jobs and even healthcare industries and financial services and tech really meet all that criteria, that AI is making all of those people highly productive, and they might still, in theory, only be working the same x% of the 40 hours, but now a lot more is being accomplished. Um, in a couple years, we know that it shouldn't be too long before we could say, 'Hey, robots are going to be highly skilled with a lot of dexterity.' And people think it's only going to be warehouses and factories. And I think that's true, but I think in a couple years, like residential construction will be transformed. Like I think homes will be built by artisan robots. Like we could build a Louvre as your house, carved out of stone, and it's like the same price as your house, and we could recreate all of this wonderful architecture that Europe had built that you can't build in America today, but with robots. So I think there's going to be that kind of productivity when robots gain a lot of capabilities.
