Fundstrat
Fundstrat's Tom Lee: Dovish Fed, Small Caps, and His ETH Call
8/22/2025, 5:12:45 PM
Economic Summary
- The Fed signaled concern that labor market risks are tilted toward softening, suggesting a dovish stance that supports risk assets and particularly small caps (IWM).
- Mortgage spreads are ~360 basis points above the 10-year versus a historical ~160 basis points, implying a potential large drop in mortgage rates that would boost housing, financials (XLF), and small caps.
- A possible ISM rebound above 50 would signal manufacturing expansion and encourage broadening of market leadership into industrials and cyclicals.
- The curve steepening may reflect improving growth expectations (a 'bull steepening'), which is constructive for growth-sensitive sectors and equities.
- There is a rotation risk: yielders and defensive sectors like consumer staples may be the primary losers in a relief rally that reallocates capital into cyclical names.
Bullish
- Small caps to benefit from a dovish Fed and broadening market.
- Financials and housing to rally if mortgage rates decline significantly.
- Industrials could recover if ISM moves back above 50, indicating growth pickup.
- AI and crypto (Bitcoin, Ethereum) remain market leadership themes.
Bearish
- Yield-oriented stocks and consumer staples may underperform as markets rotate toward cyclicals.
- Defensive sectors (staples) could lag if mortgage rates fall and housing/financials rally.
- Crypto is viewed by some as froth and speculative, risking sharp reversals.
Bullish tickers
IWMXLFBTCETH
Bearish tickers
CONSUMER STAPLESYIELDERS
BTC
Bullish
Viewed as a market leader and part of the crypto trade alongside Ethereum; benefits from regulatory clarity and institutional adoption.
Bearish
Seen by skeptics as speculative froth and vulnerable to sharp reversals.
ETH
Bullish
Framed as having a '1971 moment' with smart contracts, stablecoin progress, and potential Wall Street blockchain adoption.
Bearish
Also called speculative by skeptics despite technological narratives; faces froth concerns.
IWM
Bullish
Stands to gain from a dovish Fed, lower mortgage rates, and a broadening market rally.
Bearish
Could reverse if market breadth falters or rates unexpectedly rise.
XLF
Bullish
Likely to benefit from falling mortgage rates and stronger housing activity, driving financial sector strength.
Bearish
May lag if yield-sensitive dynamics turn unfavorable or if credit spreads widen.
CONSUMER STAPLES
Bearish
Defensive consumer staples expected to underperform as the market rotates into cyclicals.
People mentioned
Tom