Tom Lee from Fundstrat predicts that the Federal Reserve (Fed) will raise interest rates by 25 basis points today. This decision is expected at the Federal Open Market Committee meeting, which will begin at 2:00 PM Eastern Time. Lee believes that the rate hike may not only fail to stop the stock market's growth but also contribute to it, as it will lead to a decrease in government bond yields. According to Lee, the Fed does not necessarily need to raise rates to control inflation. He refers to Goldman Sachs data on temporary distortions, such as portfolio fees and tariffs, which add 1.7 percentage points to the overall Personal Consumption Expenditures (PCE) index. Lee believes these distortions will disappear over the next six months, regardless of the Fed's actions, and could reduce the PCE by about 100 basis points. He also noted that the upcoming hike may reflect market pressures rather than the Fed's assessment of the economy.
Lee expects markets to view this hike as the last in the current cycle. He pointed to a large amount of cash on the sidelines and a series of declining days as a sign of an impending recovery. He estimates that the S&P 500 index could reach 8,200 points by the end of the year, reflecting a positive sentiment towards stocks, especially in the technology and software sectors. Lee sees potential for corporate earnings growth due to a housing market recovery, which could add $30 to $50 to S&P earnings. Lee also noted that artificial intelligence remains a central element of U.S. economic growth, despite new questions about security and oversight.
In his assessment, Lee mentioned that upcoming changes in the market environment could cause a temporary pullback related to debt, leverage, and initial public offering (IPO) activity. Nevertheless, he believes that pessimism is one of the reasons why markets have not yet peaked, which could create conditions for potential growth.
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