Fundstrat’s Tom Lee expects the Federal Reserve to raise interest rates by 25 basis points today, arguing the move could still spark a substantial equity rally rather than derail one.

The Federal Open Market Committee (FOMC), the Fed’s rate-setting panel, meets today, with a decision expected at 2 p.m. ET. Lee said the hike would remove pressure for further increases, a shift he called bullish for stocks, since it would send Treasury yields lower.

Why Lee Sees the Hike as Bullish

Lee said the Fed does not need to hike to curb inflation. He cited Goldman Sachs data on four temporary distortions, portfolio fees, flash memory, tariffs, and energy.

Together, they add 1.7 percentage points to headline Personal Consumption Expenditures (PCE) inflation.

Those distortions should fade within six months regardless of Fed action, Lee said. He estimated they could cut PCE by about 100 basis points on their own.

Still, Lee said the coming hike likely reflects market pressures rather than the Fed’s own read on the economy.

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

— Tom Lee, CNBC

Lee expects markets to treat the hike as the last of this cycle. He pointed to heavy cash on the sidelines and a string of down days as fuel for a rebound.

S&P 500 Target and the AI Trade

Lee reiterated his view that corporate earnings have not yet peaked. He pointed to depressed housing investment as room for growth, potentially adding $30 to $50 to S&P earnings.

He said the S&P 500 could top 8,200 by year-end, extending earlier bullish stock calls. Technology and software shares, he added, are leading the gains.

Lee added that artificial intelligence (AI) remains central to US economic growth, even as recent developments raise new safety and oversight questions.

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

Source: BeInCrypto