2023 the supply chain and the bulwhip effect really created that initial inflationsurge, and then the media helped fuel this idea that inflation would be sticky, which allowed people to raise prices, and people to demand wages. But as that psychology broke, that cycle is now drifting lower, even expectations. - Tom Lee on what many ‘pundits’ got wrong about 2023, saying the reason was that they had only ever experienced at best the 80s frequent inflation, but never an inflation like the 70s. They focussed on a single analogy. 65% of largecap fund managers are missing their benchmark right now for 2023, way above average underperformance (usually about 55% are missing).

2024 Fed is no longer flighting an inflation war so it doesn't need to be hard on stock market. Instead it just wants to keep the business cycle healthy. That gives them room to cut rates. We're in an earnings recovery cycle. Economy is shifting more towards goods, which helps S&P earnings. Europe and Chine might recover, so earnings backdrop is quite good. People are in cash and will see they could have made way more money if they'd just stayed in the stock market. So market is well supported. Tom Lee.

But there could be big changes. It might not be as narrow. If probabiliy favors market expansion you overweight small caps. They're very cheap relative to S&P right now. The 10 year has a lot of room to come down, and that should bring down mortgage rates, so be overweight groups leveraged to mortgage rates or a recovery in housing, like regional and largecap banks. Financials have a balance sheet recovery, a credit recovery, and even maybe improved demand for credit because pentup capex. (People had been cautious and underordered and didn't expand, but then when the hard data is correct they have to start spending again, which is upside to Industrials earnings, but also helps Financials because capEx is consuming more credit. 2024 a backend loaded year, more money made in second half. AI momentum might go away (timing gets pushed out). Tom Lee.

Calling smallcaps, which have been a drag on portfolios the last few years, ‘zombies’ is an ‘unfair characterization. The Russel has always had only 70% of its companies profitable. So that’s not a problem if companies aren't profitable because that's always been the nature of the index. What matters is macro, like retail inflows. If people are taking money out of the stock market, they're not putting money into any Russel small cap index, so that's why there's been such a drainage out of smallcap and collapse of valuation. P2B is same as bottom at 1999. They have higher cost of money and are generally more levered, so this tight money has punished smallcap businesses. Soft landing isn't good for smallcaps but expansion if it happens is a huge tailwind. Tom Lee.

Financials are underowned. Positioning is lowest in 10 years for hedge funds. Tom Lee.

Technology companies are going to grow earnings faster than S&P, and multiples don't have to contract for Tech. It's just there's less juice in the thesis because there's less room for surprise. You only sell Tech if there's going to be a hard landing and then companies would slash capEx (but then you just want to be in cash). Tom Lee.

History reading is the most important way to understand society, but it's also helped create thematic research for us. Demographic studies. (Crypto disruption, millenials' dislike towards banks.) Labor shortage and AI. Listening to credit and internals. Inflation at the 32-component level. Tom Lee.

Bitcoin is the most secure way to move money. No fraudulent transactions in 15 years of their ledger, with banking 6% are suspicious. Tom Lee. You've never had a downcycle in crypto when Fed is easy.