Tom Lee’s Top 6 Reasons for ‘Conviction About the AI Trade’: ‘I’m Buying This AI Dip’
Fundstrat Capital Chief Investment Officer Tom Lee is purchasing technology equities during the current market correction. He outlines six factors supporting his sustained belief in artificial intelligence (AI) investments despite recent fund underperformance.
Fund Performance Context
In his update for the week of Oct. 19, Lee, who serves as the lead portfolio manager for the Granny Shots ETF suite, acknowledged recent portfolio declines.
The Fundstrat Granny Shots US Large Cap ETF (NYSE:GRNY) fell 5.44% over the past week, from $28.45 on Oct. 9 to $26.90 on Oct. 23, bringing its year-to-date return to 9.69% compared to a 12.14% rise for the S&P 500, as of Monday’s close.
According to Lee, the bottom five performers in the GRNY portfolio were all AI bottleneck companies: Intel Corp. (NASDAQ:INTC), Micron Technology Inc. (NASDAQ:MU), Vertiv Holdings Co. (NYSE:VRT), KLA Corp. (NASDAQ:KLAC), and Arista Networks Inc. (NYSE:ANET). Despite these figures, Lee stated, “I’m buying this AI dip.”
The Six Pillars of AI Conviction
Lee detailed his “six reasons why we have conviction about the AI trade” to address current investor concerns.
- First, Lee described AI breakthroughs as “otherworldly,” noting OpenAI models recently solved 771 math problems in three hours, representing 81% of math discoveries over the past three years.
- Second, Lee stated AI is beginning to “drive productivity,” citing an increase in S&P revenue per worker since ChatGPT’s launch.
- Third, Lee argued that hardware supply constraints indicate the industry is not oversupplied.
- Fourth, he framed substantial AI funding needs positively, stating that market nerves are raising capital costs, which is “preventing a bubble from forming.”
- Fifth, Lee noted that heavy hedge fund shorting “looks like capitulation,” adding that he sees a general derisk ahead of the midterms.
- Finally, he offered a historical analog, comparing the “correction we’re seeing today in the AI stocks” to Cisco in 1997. He noted Cisco Systems Inc. (NASDAQ:CSCO) fell 40% before mounting a 100-fold rally over the next two years.
Macroeconomic Tailwinds
Lee concluded by pointing to macroeconomic shifts, stating that the 10-year Treasury yield has sunk since the Jackson Hole symposium, which he labeled a “dovish development.”
He also noted that the odds of a December Federal Reserve rate hike dropped to 67%. Driven by these factors, Lee asserted that markets are a “coiled spring at the moment.”
How Has the Stock Market Performed?
The S&P 500 index has advanced 12.14% year-to-date. Similarly, the Nasdaq Composite index was up 14.97%, and the Dow Jones gained 9.94% YTD.
On Monday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed higher. SPY rose 0.71% to $765.37, while QQQ advanced 1.11% to $712.20. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), ended 0.31% higher at $522.97.
In premarket trading on Tuesday, SPY was up 0.38%, QQQ was 0.59% higher, and DIA advanced by 0.37%.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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