Fundstrat's Tom Lee thinks bond yields likely bottomed, expects these hard-hit stocks to rally

Published Fri, Jul 9 20212:27 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Strategist Tom Lee told CNBC on Friday he believes Wall Street's concern over slowing economic growth has likely reached its apex already, setting the stage for so-called epicenter stocks to rally in the coming weeks. Lee's comments on "Halftime Report" came one day after the yield on the benchmark 10-year Treasury note fell as low as 1.25%. The 10-year yield, which moves inversely to price, stood around 1.356% Friday afternoon. "Now we've had, I think, a growth scare that really peaked yesterday. I think the headline might have been the Tokyo Olympics," the co-founder of Fundstrat Global Advisors said, referring to organizers' decision to ban all spectators at the summer games after Japan declared a state of emergency due to coronavirus concerns. That spooked investors and played a role in the 10-year yield hitting a level it had not seen since February, he said. "Now we think the conditions are set for interest rates to shoot above consensus expectations. In other words, we think rates are drifting higher," Lee said. "That's going to lift, basically, the entire epicenter complex which has moved in lockstep with interest rates." Epicenter stocks is a phrase coined by Lee's firm to connote companies that have been hardest hit by the economic disruption wrought by the coronavirus pandemic. It includes sectors such as energy, travel and hospitality. "We're pretty confident that there's a lot of pent-up demand, revenge consumer spending, and capex, which means GDP growth will be strong, and we know the Fed is going to be supportive, so the idea now that people think rates could undershoot makes us think you want to countertrade that," Lee said. Lee has become a closely watched strategist on Wall Street, known for previous timely market calls, including turning bullish on stocks in March 2020 before many others did. Last month, Lee double upgraded the group of mega-cap tech stocks known as FAANG to overweight from underweight, citing a cooling-off in concerns about higher interest rates. At that point, the 10-year Treasury yield hovered near 1.45%. Numerous people on Wall Street had projected the 10-year yield would reach 2% by year-end. It has traded above 1.7% at various times in March and May. Lee told CNBC on Friday he has a new outlook on the trajectory of rates but still likes FAANG to be strong throughout the remainder of 2021. The acronym represents Facebook , Amazon , Apple , Netflix and Google parent Alphabet . Some on Wall Street also include Microsoft . "We think FAANG is going to detach itself from interest rates, meaning they're going to have a great second half, not because rates are going to fall but because these are great companies that almost did nothing in the first half," Lee contended. "We think if the S & P ends the year up 25% — and a lot of these FAANGS are up 5%, 6% — they could be up 20% in the second half. That makes them an overweight. That's why we still want to own FAANG even though we think there's an explosive rally in epicenter coming." Lee said a number of economically sensitive parts of the market that were standout performers early on this year are well-positioned for surprise upside moves. "I was looking at everything from the industrials to the financials to materials to energy. These have had massively deep, scary corrections. It seemed to have moved in lockstep with interest rates," Lee said. "But again, many of these groups found support at the 100-day [moving average], and they're still in uptrends, especially groups like energy, so I think as a tactical matter, if you're at the bottom end of a channel and you're in an uptrend, these are things that could move 10%, even 20% in a month." Not everyone agrees that bond yields will move higher in the second half of this year. Earlier Friday, Guggenheim's Scott Minerd told CNBC he expects the 10-year Treasury yield to continue its downward trend from recent weeks, saying it would "easily" end 2021 below 1.5% . "Technically, it looks like we're going back to the lows, which would be 65 basis points," the firm's global chief investment officer said on " Worldwide Exchange ." Watch the full interview with Fundstrat's Tom Lee above. Disclosure: CNBC parent NBCUniversal owns NBC Sports and NBC Olympics. NBC Olympics is the U.S. broadcast rights holder to all Summer and Winter Games through 2032.

Tom Lee, Fundstrat Global Advisors

Scott Mlyn | CNBC

Lee's comments on "Halftime Report" came one day after the yield on the benchmark 10-year Treasury note fell as low as 1.25%. The 10-year yield, which moves inversely to price, stood around 1.356% Friday afternoon.

"Now we've had, I think, a growth scare that really peaked yesterday. I think the headline might have been the Tokyo Olympics," the co-founder of Fundstrat Global Advisors said, referring to organizers' decision to ban all spectators at the summer games after Japan declared a state of emergency due to coronavirus concerns. That spooked investors and played a role in the 10-year yield hitting a level it had not seen since February, he said.