Tom Lee Urges Investors to Buy the Dip as Dow Plunges 631 Points

Fundstrat's Tom Lee believes Wall Street overreacted to the Federal Reserve's rate decision on Wednesday. He characterizes the steep stock selloff as a buying opportunity rather than a cautionary signal.

Cyclical stocks, financials, and energy names suffered the most in the decline. Lee predicts these same sectors will drive any recovery.

Dow Jones Sheds 631 Points

On Wednesday, the Dow Jones Industrial Average dropped 631 points, or 1.2%, closing at 51,461.

The S&P 500 slipped 0.5% to 7,551, while the Nasdaq Composite held roughly unchanged at 25,978. August retail sales came in above expectations, helping to ease some recession fears.

The downturn followed a scenario Lee had flagged days earlier. It intensified when officials indicated further rate increases before the end of the year.

Financial and energy shares led the decline as traders rotated out of rate-sensitive sectors. J.B. Hunt tumbled 13.3% after issuing a profit warning.

Lee Sees a Buying Opportunity

Lee cited Goldman Sachs research showing that inflation pressures are expected to fade over the next two quarters. That shift, he argued, should allow cyclicals, financials, and other rate-sensitive stocks to rebound.

I would be buying this dip.

Tom Lee, head of research at Fundstrat, said on CNBC.

Lee named cyclicals, technology, consumer discretionary, and financials as the sectors best positioned to lead a recovery.

A Contrarian Take

Dan Greenhaus, chief economist and strategist at Solus Alternative Asset Management, was more skeptical. He said he did not believe the Fed needed to hike rates at all. Still, Greenhaus agreed that Wednesday's market reaction appeared overdone.

I didn’t think they should hike rates.

Dan Greenhaus of Solus Alternative Asset Management said on CNBC.

Greenhaus pointed to weak spots beyond the AI-driven data center boom. Non-residential construction, he noted, has been a drag on GDP for roughly eight or nine quarters. Additional rate increases, he added, will only add more pressure there.

Greenhaus also warned that a large portion of Wednesday's sharp swing was likely driven by algorithmic trading.

The success of Lee's call may depend on how quickly the disinflation trend materializes.