Tom Lee Sees Inflation Relief Ahead

On CNBC’s ‘Closing Bell,’ Fundstrat’s managing partner Tom Lee discussed his market outlook following the December CPI report, which came in better than expected, signaling potentially dovish conditions for the economy. Lee noted that the CPI, alongside other recent inflation indicators like the Producer Price Index (PPI), suggested a cooling in inflation pressures, which could lead to lower yields and a positive market response, especially at a time when investor sentiment has been notably negative.

Regarding the Federal Reserve’s actions, Lee pointed out that the market had braced for a higher core CPI number, with whispers suggesting over 0.3%, which would have signaled a need for a rate hike. However, the actual report quelled these fears, reducing the probability of immediate hikes and possibly paving the way for rate cuts by March. He emphasized that inflation readings in the coming months might look favorable compared to last year’s numbers, setting up for “good comps.”

Lee expressed optimism for the stock market in 2025, citing positive signals from the first few trading days of the year, which historically correlate with strong annual performance. He estimated an 80% chance of double-digit returns for the S&P 500, with the market’s performance in January being a key indicator.

However, his optimism is conditional on the trajectory of bond yields. Lee warned that if yields remain elevated around 5%, it could significantly tighten financial conditions, adversely affecting sectors like housing and potentially testing the market’s resilience. He suggested that while such conditions wouldn’t necessarily “kill” equities, they would certainly challenge market confidence, particularly if investors perceive that the Fed might be committing a policy error by either maintaining too tight conditions or by having cut rates too aggressively previously.

Concerning the potential for inflation due to new administration policies, Lee was skeptical about a direct link between economic growth spurred by these policies and higher inflation. He argued that much of the inflation seen in recent years has been in specific sectors like housing and auto insurance, not broadly across the economy. He questioned whether new fiscal policies could generate significant inflation without a corresponding increase in labor market pressures, which currently do not indicate inflationary conditions.

In summary, Lee’s market outlook is cautiously optimistic, contingent on manageable inflation and declining yields, but he acknowledges the complexities introduced by potential policy changes and their uncertain impact on inflation. His analysis underscores the importance of watching economic indicators closely in the coming months to gauge the direction of both inflation and market performance.