Fundstrat's Tom Lee: Fed Rate Move Could Trigger Stock Surge

Fundstrat's Tom Lee predicts that the Federal Reserve will increase interest rates by 25 basis points on Wednesday. He argues this action could still lead to a significant equity rally rather than halt one.

The Federal Open Market Committee (FOMC), which sets rates for the Fed, convenes today. A decision is due at 2 p.m. ET. Lee stated the hike would reduce the need for additional increases, a development he views as positive for stocks because it would push Treasury yields down.

Why Lee Sees the Hike as Bullish

According to Lee, the Fed does not need to raise rates to control inflation. He referenced Goldman Sachs data pointing to four temporary distortions: portfolio fees, flash memory, tariffs, and energy.

Collectively, these add 1.7 percentage points to the headline Personal Consumption Expenditures (PCE) inflation measure.

Those distortions are likely to subside within six months regardless of Fed policy, Lee said. He estimated they could reduce PCE by roughly 100 basis points on their own.

Nevertheless, Lee indicated the upcoming hike probably reflects market pressures rather than the Fed's own economic assessment.

“I don’t know if the Fed really needs to accelerate that process.”

— Tom Lee, CNBC

Lee anticipates that markets will view the hike as the final one in the current cycle. He pointed to substantial cash reserves on the sidelines and a series of down days as factors that could drive a rebound.

S&P 500 Target and the AI Trade

Lee repeated his belief that corporate earnings have not yet reached their peak. He noted depressed housing investment as a source of potential growth, which could add $30 to $50 to S&P earnings.

He stated that the S&P 500 could reach above 8,200 by the end of the year, extending earlier bullish stock forecasts. Technology and software stocks, he added, are driving the gains.

Lee added that artificial intelligence (AI) remains crucial to US economic expansion, even as recent events raise new questions about safety and oversight.

Lee still expects a larger downturn later this year, linked to margin debt, leverage, and initial public offering (IPO) activity. For now, he said pessimism itself is why markets have not topped out yet.