Fundstrat’s Tom Lee contends that the market is misinterpreting rising Treasury yields. Instead of viewing them purely as a threat to equities, he suggests they are acting as a mechanism to separate strong companies from weak ones.
Entering a panel discussion in progress, Lee was asked to weigh in on an ongoing debate among two guests regarding whether surging yields signal trouble for the stock market. Rather than aligning with either side, he shifted the perspective, asserting that the crucial factor is not the climb in yields itself, but rather which corporations can maintain growth amidst the increase.
Yields as a Filter, Not a Flat Tax
The 10-year Treasury yield touched 5.04% on September 15, and the 30-year Treasury yield reached its highest level since 2004—and its highest since 2007—just days following the Federal Reserve‘s first rate hike since 2023, which raised its target range to 3.75%-4.00%.
During an appearance on CNBC’s Closing Bell, Lee disputed the notion that such a move is universally negative. He argued that the market is still determining whether this represents a permanent shift or a temporary adjustment—a debate that had little impact on cryptocurrency prices in the immediate aftermath of the decision.
Lee pointed out that elevated borrowing costs do not impact all businesses equally. Well-funded firms maintain straightforward access to capital, whereas smaller and more vulnerable competitors face difficulties, thereby widening the performance gap between them.
He explained that this mechanism helps account for the strength of mega-cap tech stocks amid rising yields, noting that their advantage in securing financing becomes increasingly significant as financial conditions tighten for others.
A Disinflation Case Lee Says Is Underpriced
Lee remains optimistic regarding inflation as well. He anticipates that both headline and core inflation figures will decline significantly over the following half-year as the impact of tariffs diminishes, the AI-driven surge in memory-chip costs subsides, and oil prices remain stable near $100 per barrel.
Additionally, he pointed to a technical factor: the Bureau of Economic Analysis’s September 30 methodological update to the Personal Consumption Expenditures (PCE) price index. Lee estimated this revision could reduce the annual inflation rate by 20 to 40 basis points.
Meanwhile, separate projections from TD Securities and Wells Fargo estimated a smaller impact of 15 to 20 basis points, which nevertheless points in the same direction and supports his overall argument.
Host Scott Wapner questioned Lee on the potential outcome if yields and inflation persist above expectations past his six-month timeline.
While acknowledging this uncertainty, Lee maintained that the preponderance of data still points toward a genuine deceleration in price increases. He noted that this trend is equally significant for the cryptocurrency market and equities, given that both have closely followed the trajectory of real yields throughout the year.
Frequently Asked Questions
How does Tom Lee view rising Treasury yields?
Tom Lee argues that rising yields are not a blanket threat to the stock market, but rather a financial filter that separates strong, well-capitalized companies from weaker competitors.
What were the specific Treasury yield milestones mentioned?
The 10-year Treasury yield reached 5.04% on September 15, and the 30-year Treasury yield climbed to its highest level since 2004 (and highest since 2007) following a Federal Reserve rate hike.
Why does Tom Lee expect inflation to fall?
Lee anticipates that headline and core inflation will drop over a six-month period due to fading tariff effects, a cooling in AI-driven memory-chip prices, stable oil prices near $100 a barrel, and a technical methodology revision to the PCE index.
What do independent analysts estimate for the PCE index revision?
While Tom Lee estimates the BEA’s PCE index revision could shave 20 to 40 basis points off the annual rate, independent estimates from TD Securities and Wells Fargo put the impact at a more modest 15 to 20 basis points.
