Tom Lee says rising bond yields are not ‘an equity market killer,’ sees stocks rallying into year-end

Published Tue, Sep 28 20212:03 PM EDTUpdated Tue, Sep 28 20216:09 PM EDT

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

Wall Street strategist Tom Lee told CNBC on Tuesday the stock market should be able to rally in the face of rising bond yields if the spike in rates is due to reasons such as economic strength. In an interview on " Halftime Report ," the Fundstrat Global Advisors co-founder cautioned investors from viewing higher yields as automatically negative for stocks. "Rates is a headline number. If the economy is expanding and strengthening and there's pent-up demand and shortages and that causes reflation and higher rates, that's obviously very good earnings. It's good for return on invested capital, and it means higher interest rates," Lee said. "But that's exactly the environment from 1950 to 1970. I think anybody who really studies markets would understand rising rates isn't an equity market killer," added Lee, who has become a closely watched strategist during the coronavirus pandemic after issuing some timely investment calls. Lee's comments Tuesday came as Wall Street struggled, with the tech-heavy Nasdaq leading the declines as it slid roughly 2.8%. The S & P 500 dropped about 2.1%, while the blue chip Dow Jones Industrial Average fell about 1.6%. The yield on the benchmark 10-year Treasury note rose as high as 1.558% on Tuesday , continuing a speedy climb that started last week. Yields move inversely to prices. Growth stocks, many of which are in the technology sector, are particularly sensitive to higher interest rates. One reason for that is because low borrowing costs can help power their business expansion. Another reason is because higher rates change a key variable investors use in discounting future cash flows, which can have the effect of compressing equity valuations. All three major U.S. indexes were solidly in the red for the month. However, Lee said he believes when looking at the big picture, the market and economy have shown resilience. He added he thinks "demand for tech products" will still continue to rise. "I think these are reasons why investors need to look through the short-term pain, and I don't think it really changes the probabilities of a big rally into year-end," he said. Lee said he's not overly concerned with lower revisions to economic growth forecasts , at least as it relates to where the market can go. "If someone is saying, 'Well, third-quarter GDP numbers are going to get cut, or earnings are going to miss, so therefore stock markets are topping,' that must mean there was 100 tops in the stock market just since 2010," Lee said. "I think what we have to keep in mind is bull markets basically end when the economy itself is exhausting capital, like there aren't any strong returns to be earned." "We're in an environment where there's supply chain glitches. It's causing delays and price increases, but that's not an environment that causes profit margins to collapse," said Lee, a former chief equity strategist at JPMorgan. "Profit margins collapse when there's a demand problem or companies cannot pass on price, or investors overprice things. ... To me, I don't think it's ever happened Year 1 into an expansion." Watch the full interview with Fundstrat's Tom Lee above.

Tom Lee

Adam Jeffery | CNBC

Wall Street strategist Tom Lee told CNBC on Tuesday the stock market should be able to rally in the face of rising bond yields if the spike in rates is due to reasons such as economic strength.