Fundstrat managing partner and head of research Tom Lee said tech stocks could rally at least 15%, and perhaps 20%, as he expects hedge funds to rebuild exposure following the Democrats' midterm sweep. In an interview with CNBC's "Closing Bell," Lee outlined a case for a rebound in technology shares, particularly among hyperscalers and data center operators.
Data Center Selloff Called an Overreaction
Data center operators such as IREN, Hut 8, Applied Digital, and Core Scientific lost between 1.2% and 13% on Wednesday. Lee characterized the selloff as an overreaction.
Divided Washington Seen as a Tailwind
Lee told CNBC that Democratic control will change how Washington works. "I think it's going to force Washington to sort of now negotiate, which is a good thing," he said. He added that the result eases pressure on the Federal Reserve, whose rate-setting panel no longer needs to weigh hikes to prove its credibility, according to Lee.
Early trading pointed in the same direction. The Dow rose 2.3%, the S&P 500 gained 1.7%, and the Nasdaq Composite advanced 2.1%.
Hedge Funds Expected to Return to Tech
Lee estimates that about half of hedge funds focus on technology, media, and telecom (TMT). He expects them to return to tech rather than buy names such as Coca-Cola. Hyperscalers, the cloud giants building AI infrastructure, should lead the rebound, according to Lee. Amazon gained 7.1% and Alphabet 3.4% in early trading.
That rebuild would follow a retreat in which hedge funds sold AI stocks in their biggest stock pullback since 2017. Lee argued that states need data center revenue, and that scarce computing power will revive bottleneck concerns. "I think it's all going to come back very strongly before year end," he said.
Risks to the Rebound Case
However, Goldman Sachs economists warned that Democratic state and local wins could bring temporary data center construction pauses. Those pauses could affect about 45% of planned US capacity growth.
Lee's rebound case weakens if opposition to data centers spreads beyond Texas and Georgia. Democrats made gains in both states, where public resistance to the buildout has grown.
Other Sectors Favored
Outside tech, Lee favored financials, citing a calmer rate market, and industrials, citing lower energy prices. Meanwhile, a CNBC host said crypto rallied as Democrats now push to pass crypto legislation they opposed before the midterms.
