Tom Lee Predicts Stock Rally Amid Fed Rate Hike Expectations

Fundstrat's Tom Lee predicts the Federal Reserve will raise interest rates by 25 basis points today, arguing this move could trigger significant stock market gains rather than derail a rally.

The Federal Open Market Committee (FOMC), the Fed's monetary policy body, is set to announce its decision at 2 p.m. ET following its meeting. Lee views the rate hike as resolving pressure for further increases and considers it positive, noting lower Treasury yields would benefit equities.

Lee argues the Fed may not need additional hikes to curb inflation, citing four temporary distortions—portfolio fees, flash memory, tariffs, and energy—that collectively add 1.7 percentage points to headline personal consumption expenditures (PCE) inflation. He estimates these factors could lower PCE by approximately 100 basis points on their own within six months.

While Lee expects the market to view this rate hike as the final move in the current cycle, he notes cash remains on the sidelines and recent downturns may fuel a rebound. He reaffirms his stance that corporate earnings have yet to peak, with housing investment recovery providing room for S&P 500 earnings to rise by $30-$50.

Lee forecasts the S&P 500 could exceed 8,200 by year-end, extending previous bullish market predictions. He highlights technology and software stocks as leading the upward trend, while emphasizing artificial intelligence (AI) remains central to U.S. economic growth despite recent safety and regulatory concerns.

Lee anticipates larger corrections in credit balances, leverage, and IPO activity later this year but asserts the market peak has yet to arrive due to investor pessimism.