Tom Thornton: Bloodbath Incoming for the Mag 7?

A tough 2024, a worried outlook on 2025, and why Tom wants to "hide in a witness protection program and never look at markets again."

Some people take noisy public victory laps about their up years, and disappear from view during their down years. Hedge Fund Telemetry’s Tom Thornton is not one of those people. Despite wanting to “hide in a witness protection program and never look at the markets again” after a tough 2024, he joined me on Talking Markets yesterday to discuss what he got wrong this year and what he sees coming in 2025.

As one of the viewers in the chat said, “Truth is always praised.” And we all get to be wrong sometimes. Hat tip to Tom for getting into the details with us.

2024 Review

“I’ve been wrong all year,” Tom said. “I haven’t been in the mega cap names, I don’t trade Bitcoin. Kudos to all that have participated.”

As a long short manager, Tom says the market conditions this year haven’t suited his trading style. “I’m really good as a manager when there are defined pullbacks - and not 2.5 day pullbacks, but those that last a few weeks, that trigger some oversold conditions.”

That doesn’t mean he’s going to change his style though. “I stick to a process,” he said. “I would like to hide in a witness protection program and never look at the markets again after this year. But I look at it also as an opportunity because crazy markets I've traded before, I've done well in those types of markets and we'll be there again. But it's just gone on way further than I anticipated.”

💡2024 has been “all about the future,” he said, citing Broadcom as an example. “Broadcom came out with some tepid guidance, but they said in 2027, there's a total addressable market of 80 to $90 billion. And boom, there you go, it's the future. Everybody's been buying into the future.”

It’s a Gamblers’ Market

Pointing at high options activity, Tom says we’re in “a total gamblers’ market.” “We can trade on stocks during the week and we can gamble on sports during the weekend,” he said.

There’s been a wave of inflows since the US presidential election (Goldman Sachs says about $200 billion), with retail making up a substantial chunk. “You have tons of people from out of the country, from Korea and Japan, just trading US stocks,” Tom said.

And then there’s the amount of leverage in the system, which Tom says makes him “wake up in the middle of the night and scream.”

The Magnificent 7

The so-called “Magnificent 7” are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, which have contributed massively to gains in the S&P.

Tom didn’t buy into the Mag 7, and is skeptical on how much further they can go. Excluding Nvidia, the growth rate of the Mag 7 is around 3%, he said, which doesn’t match up with what they’re trading at.

• On Apple: “You’re looking at Apple trading 10 times sales, which is the highest ever, and 35 times earnings. Apple will come out with a new flip phone or an iPad that is thinner or something, and people will bid that up, but it’s just because of the flows.”

• On Nvidia: “If you're gonna be in a stock, you probably can sleep in that one if it dropped 40 % because you know it has earnings for the next year or two years.” Tom added that he’d buy back into Nvidia around $100.

• On Tesla: “I’m out of Tesla, which is a relief. Tesla has gained about 700 billion since the election, and their earnings are probably going to be lackluster,” he said. “Tesla is going up the equivalent of a Waymo or a GM each day. We have the usual suspect analysts that will raise their price targets, but they don't raise their earnings forecast. It's a fricking mania.”

“I do think that it's just a matter of when the music stops and everyone's scrambling for a seat and there's nothing there,” Tom said. All it would take is “one company started to say, it's a little slippery here, or we're pulling back on our CapEx, or the data center business starts to slow a little bit.”

2025 Outlook

Tom made some strong predictions for 2025. He thinks “you’re gonna see some of the largest market cap declines in history” next year, adding: “and I strongly believe those will be coming out of the Magnificent 7.”

“We haven’t had any sort of pullbacks, and you need pullbacks to soften the tension,” he said. “We haven’t had [much] rotation, either. And the longer you go up in a straight up formation, the steeper the decline that can happen.”

While Tom doesn’t really do price targets, he said “I do anticipate seeing the S&P under 5,000 at some point in the year, and maybe 4,500. I also wouldn’t rule out the potential for something more dramatic in the sense of some sort of crash. And I don't say that lightly and I'm not predicting it tomorrow, but I think as we've just gone straight up and we haven't had any meaningful correction, and people are so positioned on one side, it could be something dramatic.”

As for the outlook on the incoming Trump administration next year, Tom thinks a lot of the positives have already been priced in. “There's a lot of, again, the future that people are betting on that don't match up with current realities,” he said.

What He’s In and What He’s Looking For

Tom is currently short some financials, some industrials, some transports, and homebuilders.

He’s “looking for things that are bombed out.” He just bought a little AMD, and some Etsy. “Etsy has been sort of under the radar and hasn’t been doing well, but I think that the stock’s starting to shape up, and at around $60 here, it’s sort of an inflection point,” he said.

He’s also “probably going to buy energy sometime in January,” he said. “It tends to have a really good seasonal period. We'll see if that happens again.”

Tom also mentioned a few names he’s had a good year with, including PureCycle, which he mentioned on Talking Markets back in October, and Golar LNG.

Be Half Wrong

“I think the best advice I could give is to be half wrong,” Tom said. Basically, he says from a risk management perspective that if you’re not sure whether to get out of a position, you could sell half. “It’s an imperfect business, so take imperfect gains and imperfect losses at times,” he said.

An imperfect business indeed.

To watch the full episode, right this way.

Enjoy,

Maggie

Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and overall financial plan.