Tom Lee Says Surging Treasury Yields Separate Strong from Weak Stocks

Fundstrat's Tom Lee contends that the market is incorrectly interpreting the surge in Treasury yields. He suggests they are not a threat to stocks but rather a filter distinguishing strong companies from weak ones.

Lee entered the discussion partway through, having been called upon to address two panelists who had argued about whether rising yields are harmful for equities. Instead of taking a side, he recast the debate, stating that the key point is not the rise in yields itself but which businesses can sustain growth amid that rise.

Treasury Yields as a Filter, Not a Uniform Tax

On September 15, the 10-year Treasury yield climbed to 5.04%. At the same time, the 30-year Treasury yield reached its highest since 2004, a level not seen since 2007. These moves came days after the Federal Reserve raised rates for the first time since 2023, setting the target range at 3.75% to 4.00%.

During his appearance on CNBC's Closing Bell, Lee challenged the view that such a development is unequivocally bad. He said the market is still assessing whether this reflects a lasting change or a one-time event, a conversation that barely affected cryptocurrency prices in the days after the decision.

According to Lee, increased borrowing costs do not affect all companies equally. Well-capitalized businesses maintain easy access to funds, whereas smaller, less robust competitors find it harder to compete, thereby increasing the disparity.

Lee said this dynamic accounts for the strength of mega-cap technology stocks despite rising yields, because their financing advantage becomes more valuable as conditions get tougher for others.

A Disinflation Scenario Lee Says the Market Is Ignoring

Lee is also optimistic about inflation. He predicts that both headline and core measures will drop significantly in the coming six months as the impact of tariffs subsides, the recent AI-related surge in memory-chip prices moderates, and oil remains around $100 per barrel.

He also flagged a technical factor: the Bureau of Economic Analysis's September 30 methodology revision to the PCE index. He estimated this could reduce the annual rate by 20 to 40 basis points.

Separate calculations from TD Securities and Wells Fargo suggest the impact is around 15 to 20 basis points, a smaller amount but still aligning with his view.

Host Scott Wapner asked Lee about the scenario in which yields and inflation remain high beyond his six-month timeframe.

Lee conceded the uncertainty but stated that the overall evidence still points to a genuine deceleration in price increases. Such a shift would be significant for both cryptocurrencies and equities, as both have closely followed real yield movements this year.