Stocks have taken a beating recently as investors dump one-time darlings of the AI trade, but they will rebound, according to Fundstrat Global Advisors cofounder Tom Lee, who has a strong recent track record of market forecasts.
Chip stocks in particular have been leading the decline, which left the S&P 500 down 1.6% for the week and the Nasdaq off 2.9%. The latest catalyst was the release of a Chinese AI model that cast doubt on hyperscalers’ gargantuan spending plans.
In an interview on CNBC on Friday, Lee argued that the companies selling off are at the center of “one of the most important strategic initiatives” for the U.S., namely AI, and they still have years of runway ahead.
The market pullback is actually healthy because it reduces speculation ahead of upcoming earnings reports from the AI sector, he added.
“I would still stick with those,” Lee said. “I think those names are going to bounce later this year. So I don’t think that the trade is over.”
But he acknowledged that the ubiquity of leverage in the market today is fueling more volatility, calling zero-day trading options and leveraged funds “push-button liquidity for everybody.”
In fact, margin debt is up 54% annually, marking the sixth biggest surge in the last 60 years, Lee estimated. After the other five top increases, the market similarly consolidated.
That dynamic was evident in South Korea, which has experienced a nationwide stock-trading mania as chipmakers SK Hynix and Samsung ride the AI wave.
Frenzied demand for more ways to capture upside from those stocks gave rise to leveraged ETFs that further stoked the country’s market rally.
But the Korean stock boom has gone bust in recent weeks. The once-soaring Kospi index has plunged 27% after a hitting a record high last month, putting it well into bear market territory.
As a result, 1.2 million brokerage accounts had a margin call, representing as much as 10% of Korea’s accounts, according to Lee. As traders are forced to sell holdings to cover margin debt, a massive correction followed.
That’s sending ripples across global markets, which have been especially sensitive to moves to bellwether stocks in the AI trade.
For example, SK Hynix’s comments last month that it planned to slow down its AI memory business sparked the Kospi’s fifth worst daily plunge and dragged down indexes around the world.
But compared to the Kospi 27% crash, the S&P 500’s 2% dip from its recent high and the Nasdaq’s 6% slide look like speed bumps. And Lee sees that as a positive sign.
