Tom Lee: Excessive Pessimism Grips Markets, S&P Eyes 9% Rally to 8,400

Fear is running ahead of the facts, and the labor data proves it. September added only 29,000 jobs while unemployment held at 4.2%, underscoring a clear labor cooldown . CNBC reported expectations near 84,000, with August revised to 133,000 and July down to minus 10,000. The Conference Board notes the three-month average has fallen to 51,000 with wage pressure gone, removing a key inflation threat.

Weak payrolls may force a rapid rethink at the central bank. With wage-driven inflation fading, the current hawkish stance looks increasingly hard to sustain. The Conference Board calendar flags October 14-15 CPI and PPI releases, where energy poses upside risk, making the October 30 FOMC meeting pivotal. September CPI due in about two weeks, followed by a soft six-month inflation path, keeps easing bets alive.

Bonds, liquidity and new highs

Bonds are setting the ceiling for stocks, and the line in the sand is obvious. The 10-year yield hovered near 4.75% before Jackson Hole, with the yield threshold at 5% now in focus. CNN notes 5% would be the first sustained break since 2007, touched only briefly in 2023. Despite Treasury Secretary Bessent's efforts, selling persists across the $32T market. Holding below 5% flashes green for risk appetite .

Technology is climbing while its quiet leading indicator already turned. Big tech pushes toward fresh highs as revived crypto signals improving liquidity expectations. A Fundstrat note relayed by CNBC framed 7,000 as a buy-the-dip zone, suggesting today's optimism has roots. As easing bets build, a leveraged broadening move into growth stocks could accelerate quickly.

The year-end target sounds bold until you check the arithmetic. An S&P 500 range of 8,200-8,400 implies roughly 9% upside from here. FactSet sees Q3 earnings growth at 8%, yet history suggests beats could lift it above 13% and extend a nine-quarter growth streak. Investing.com writes that Q3-Q4 revisions unusually turned higher, with a clear lift after big tech results. A 20% upward revision to 2027 EPS, cheaper multiples, and a stronger exporter America on energy complete the bull case.

Elections, sentiment and the contrarian twist

The choppy calendar stretch may prove shorter than feared. A rolling correction since late June has worn down indexes but spread selling over time, dulling shock value. Mid-October into the midterms looks like a temporary speed bump . 22vresearch.com (22V Research) points to November 3 midterms with AI data centers as the central campaign issue, noting supportive states fell from 27 to around 15 while 107GW of computing demand fuels debate. Widespread gloom builds fuel for reversal.

Elections scare investors, yet history tells a calmer story. Research shared via themoneytimes.media citing JPMorgan shows gridlock periods gained 21% on average since 1950 versus 18% under single-party control. Divided government restrains spending and regulation, which markets read as stability. AI names stalled by data-center fears and clarity-act uncertainty could lead once that uncertainty premium unwinds.

The real contrarian opportunity may lie in post-vote politics. Democrats distant during campaigning could back data-center investment and clarity legislation after ballots close. Such a pivot would powerfully catalyze beaten-down AI stocks. When excessive pessimism lifts, delayed buying has often rushed back fast. In that script, patience beats panic and math beats fear.