Why Tom Lee says the odds favor a stock-market rally after the Fed decision

Happy Fed Day to all who observe, and at least one widely followed analyst says there's potential for market fireworks despite the 98.8% probability (according to futures markets) the central bank won't move interest rates.
That analyst is none other than Tom Lee, the head of research at Fundstrat Global Advisors, whose enthusiasm for stocks generally extends to any day ending with the letter 'Y.'
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Why Tom Lee says the odds favor a stock-market rally after the Fed decision
Lee, like most everyone, isn't expecting the Fed to cut interest rates later on Wednesday. But he does make a notable case for why the market may react positively.
'We believe the Fed will acknowledge that inflation is undershooting their expectations. Recall the Fed has argued that tariff uncertainty causes them to be on hold. But incoming inflation has been soft,' says Lee.
The consumer price index rose a scant 0.1% on a monthly basis in May. Import prices were flat. A real-time measure of import prices, updated through data last week, also has shown little pass through from tariffs to end prices.
Market-based measures have fallen to the lowest level in a year, he adds.
'So we think Fed will have to acknowledge this. And we know there is a lot of partisan bias in the inflation consumer surveys,' says Lee. 'So markets likely realize Fed will have to relent eventually and return to a dovish bias.'
Lee expects the stock market to return to all-tim highs (the S&P 500 was only 3% away anyway) — he said bitcoin is a leading indicator and the cryptocurrency achievved a record last week. He still has a 6,600 target for the S&P 500 by year end.
Stock-market futures ES00 NQ00 were flipping between small gains and losses after an 0.8% retreat for the S&P 500 SPX on Tuesday. Oil CL00 edged higher.
Key asset performance
Last
5d
1m
YTD
1y
S&P 500
5982.72
-0.93%
0.71%
1.72%
9.03%
Nasdaq Composite
19,521.09
-0.98%
1.98%
1.09%
9.29%
10-year Treasury
4.382
-4.50
-22.30
-19.40
15.50
Gold
3396.8
0.62%
2.42%
28.70%
44.90%
Oil
72.63
6.34%
18.41%
1.06%
-10.09%
Data: MarketWatch. Treasury yields change expressed in basis points
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At pixel time, the U.S. military still has not joined Israel's fight with Iran, which continued into Wednesday. Iran's supreme leader said the country would not surrender, replying to U.S. President Donald Trump's demand on Tuesday.
The Fed decision — and importantly, the dot plot of interest-rate projections — is coming at 2 p.m. Eastern, with Fed Chair Jerome Powell's press conference at 2:30 p.m. Morgan Stanley's economists say they still expecting the dot plot to forecast two rate cuts this year.
Weekly jobless claims dipped by 5,000 to 245,000, while housing starts tumbled 9.8% in May to an annual rate of 1.26 million.
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Data on the U.S. economy is clearly deteriorating, says Neil Dutta, head of economic research at Renaissance Macro. This chart plots the decline in building material sales, which at a seasonally adjusted annual rate have tumbled 7.7% over the last six months. 'Recall that building material store sales represent an intermediate product that ultimately affects residential investment,' he says. Besides the retail sales report, Dutta also noted the New York Fed's service sector index points on ongoing contraction, industrial production fell for the second time in three months and home builder confidence fell to the lowest level since 2022.
Here were the top stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker
Security name
TSLA
Tesla
NVDA
Nvidia
GME
GameStop
PLTR
Palantir Technologies
AMD
Advanced Micro Devices
AAPL
Apple
TSM
Taiwan Semiconductor Manufacturing
AMZN
Amazon.com
MLGO
MicroAlgo
CRCL
Circle Internet Group
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