Tom Lee Says CPI Could Be ‘Pivot Point’ For Markets – Sees ‘Pretty Sizable’ Stock Rally If Inflation Cools

In an interview with CNBC, Lee said that stocks could rise even if the Fed hikes next week, since the move may already be priced in.

• According to Lee, a core CPI reading of 0.2% or lower could reduce expectations for a September rate hike and trigger a market rally.
• He said that the AI infrastructure buildout is adding inflationary pressure and driving demand for debt.
• Lee added that higher rates alone may not slow AI spending, given companies’ ability to justify higher borrowing costs.

Fundstrat’s Tom Lee said Friday’s consumer price index report could become a “pivot point” for markets, with a softer inflation reading potentially shifting expectations around next week’s Federal Reserve decision and giving stocks room to rally.

In an interview with CNBC, Lee said CPI has "already been trending lower," although he noted that the PCE inflation gauge, the Fed’s preferred measure, remains meaningfully higher.

"If we get a decent CPI, hopefully 0.2 or lower, I think you're going to instantly see the market price in no hike in September,” Lee said. CME FedWatch Tool shows markets are currently pricing a September rate hike probability just below 70%. 

According to Lee, a softer inflation report could have a bigger impact than simply reducing the risk of a September rate hike. "I actually think that's going to be the start of a pretty sizable equity rally as well," he said.

U.S. equities gained in pre-market trade on Friday. The SPDR S&P 500 ETF (SPY), the SPDR Dow Jones Industrial Average ETF (DIA) and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) all moved around 0.6% higher. Retail sentiment around SPY on Stocktwits fell to ‘bearish’ from ‘neutral’ territory over the past day.

AI Infrastructure Spending Keeps Inflation Bar High

Lee said the scale of spending on AI infrastructure is creating a separate challenge for policymakers, particularly because companies are increasingly relying on debt markets to fund the buildout.

"I think that's the challenge. The Fed raising rates is probably not going to solve or slow down the AI spend," Lee said. "These companies probably can justify their spend even if the Fed raises rates 100 basis points.”

Lee Says Markets Could Rally Even If Fed Hikes

According to Lee, even if policymakers raise rates, he said he does not expect the move to necessarily trigger another selloff in stocks.

"I think even if the Fed raises rates next week, which I don't believe is what the market's pricing. And this is not what we're expecting because a lot of that's baked in,” he said. “I actually think it would be something the stock market would rise on because it's been waiting for this to happen."

The monthly core CPI reading will be particularly important for markets. Consensus estimates call for headline inflation to rise 0.4% in August, putting annual inflation at 3.4%, while core CPI is expected to increase 0.2% from the prior month, with annual core inflation at 2.4%.

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