Tom Lee says Democrats will support CLARITY Act after midterm elections

Key facts

BitMine Chairman Tom Lee said his reverse view is that after the US midterm elections on November 3, Democrats will begin to support the CLARITY Act and data center construction. He called the vote a "clearing event" in the market.

Lee pointed out that the strong performance of cryptocurrency and technology stocks suggests that the market expects the financial environment to become more relaxed, as these two asset classes typically perform poorly in an environment of tightening monetary policy.

He expects the yield on the 10-year Treasury bond to fall below 5% within six months from 5.28% on October 2, and believes accelerating earnings will make stock prices cheaper than they were in January this year.

Market stagnation and reverse logic before the midterm elections

BitMine Chairman and Fundstrat Research Director Tom Lee said that the stagnation of cryptocurrency and artificial intelligence (AI) stocks stems from misjudgment fears about the U.S. midterm elections. He believes that once the vote is passed, Democrats will support the CLARITY Act.

In an interview with CNBC on Monday, Lee said: "AI stocks and cryptocurrencies are stagnant because people are worried that Democrats don't support data centers or the CLARITY Act."

But he emphasized: "Our reverse view is that after the midterm elections, Democrats will start supporting data centers and the CLARITY Act." He pointed out that the bill "has many Democratic supporters." The market structure bill failed in a procedural vote in the Senate last month, and seven Democratic senators subsequently pledged to continue pushing for the bill to survive.

Americans will hold midterm elections on November 3. Lee called this "a clearing event" and believed that regardless of the outcome, it could be a strong signal of rising market appetite for risk. He reasoned that if Congress were controlled by Democrats, markets might interpret it as a political deadlock, which is usually what markets would like.

Why does Tom Lee think cryptocurrency signals signal easing Fed policy?

Lee said that before the release of last week's non-farm payrolls report, the market had been operating in accordance with the "extremely hawkish Federal Reserve" expectations of raising interest rates three times, with the probability of raising interest rates in October as high as 75%. However, Labor Department data showed that non-farm payrolls increased by only 29,000 in September.

Lee said: "Technology stocks hit new highs and cryptocurrencies performed strongly-assets that cannot perform well with tightening monetary policy. They signal that we are about to usher in a looser financial environment."

Expectations for interest rate hikes have dropped sharply in the past week.

As one-time factors fade, he expects inflation readings to soften over the next six months, bringing the yield curve back to normal. He said that a ten-year yield below 5% would be interpreted by the market as a very positive signal for risky assets.

Federal Reserve data showed that the yield on the 10-year Treasury note was 5.28% as of October 2, compared with 4.75% before the Jackson Hole meeting.

Tom Lee's outlook for the S & P 500: Earnings growth, downward valuation

When asked whether the S & P 500 would reach 8,200 to 8,400 points at the end of the year, and his interviewer described the market as a "ready spring," Lee said corporate earnings growth was accelerating. He pointed out that third-quarter earnings may grow by nearly 30%, and since January this year, 2027 earnings forecasts have risen by more than 20%, outperforming the index increase.

He said: "If someone thought the market was expensive at the beginning of the year, it's actually cheaper now."

However, he did not give up warning about potential pullbacks. Lee said there could be a "speed bump" from mid-October to the midterm elections, adding that he was reluctant to make overly absolute judgments when emotions were low.

Lee has been one of the more aggressive bull market voices in this cycle. He has predicted that Bitcoin will see its largest rise and said Ethereum (ETH) is expected to hit a record high before the end of this year.

According to CoinMarketCap data, at the time of writing, Ethereum was trading at US$2,716.