Midterm gridlock could clear the way for a risk-on rally, Tom Lee says

The US stock market could face a correction from mid-October through the midterm elections, but crypto and technology stocks may benefit afterwards if Democrats become more supportive of the CLARITY Act and data-center projects, Fundstrat’s Tom Lee said in an interview with CNBC.

The strategist said crypto and AI stocks have stalled ahead of the midterms partly because of concerns that Democrats do not support the bill or the expansion of data centers. Lee argued that those concerns were misplaced.

“Our contrarian take is that after midterms, the Democrats are going to start supporting data centers and CLARITY Act because, one, data centers are generally providing a lot of economic benefits to the community. And CLARITY Act had many Democratic supporters,” he said. “I think the AI stocks are going to benefit post-midterms because the change in Congress is actually going to sort of greenlight some projects.”

Lee also expects the macroeconomic backdrop to become more supportive for risk assets. The latest jobs report has weakened the case for the maximum-hawkish Fed scenario that markets had been pricing in, which included three potential rate hikes and a 75% probability of an October increase, he said.

With one-off inflation factors expected to roll off, Lee sees softer inflation readings over the next six months.

“That allows not only the Fed to kind of walk back from its hawkishness, but I think it’s going to allow bond yields to actually sort of normalize,” Lee noted.

“Anything under 5% would be interpreted by markets as really positive for risk on… I think there’s a good chance in the next six months we’re going to see yields below 5%,” he explained.

Lee expects the S&P 500 to rise as much as 9% by year-end, potentially reaching 8,200 to 8,400. He said earnings growth is accelerating, with third-quarter earnings potentially approaching 30% and 2027 earnings estimates up more than 20% from the start of the year.