A sharp market sell-off is testing investor sentiment after one of the strongest rallies of the year, but Fundstrat’s Tom Lee says the drop may be exactly what the market needs.
In a new CNBC interview, the Wall Street strategist, known for his bullish outlooks on US equities, says the latest pullback is “overdue” following months of gains.
He points out that the surge in the CBOE Volatility Index (VIX) is a sign of a healthy reset, not the start of a broader downturn.
“We’ve had a nice rise of 36% since the April lows. I believe today’s decline is the biggest in more than six months. It’s good to see the VIX spike. The VIX spiked at 1.29% today. That’s the 51st largest ever spike in the VIX. We’re a top 1% move in what I’d say the market seeking safety. I think it’s a good flush that’s happening today.”
He adds that the soaring VIX levels indicate that traders are rotating into hedges, not abandoning stocks outright.
“It shows you that investors are seeking protection. And as you know, the VIX is a measure of expected volatility of the largest 100 stocks. And so a spike in the VIX is really a market saying, OK, I need to get out of everything, but I can’t sell everything. So let me hedge it by buying volatility. And that is usually a sign of an interim low.”
While Lee stops short of calling an immediate bottom, he argues that forward returns tend to be strong after similar volatility spikes.
“I don’t want to say I think markets are bottoming today, but we know that the forward returns are pretty good one month and even one week later. So I would say if someone says, ‘Are we higher a week from today?’ I’m going to say the odds are actually really good. Or, we might even be 60 points higher.”
Looking ahead, Lee says the fundamental drivers behind the 12-month equity rally remain intact.
“What are the reasons stocks have been attractive for the past 12 months? It’s been about the innovation coming from AI, and it’s the innovation as Wall Street looks onto the blockchain, and now it’s the Fed that’s beginning an easing cycle. These three things have structural tailwinds that aren’t disrupted because of potential even rare earth dispute with China.”
The S&P 500 dropped 2.71% on Friday after US President Donald Trump announced more tariffs against China, saying that the Asian giant is imposing export controls on “virtually every product they make.”
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