Tom Lee says the bar is lower for the Fed to cut and so stocks are set to do ‘quite well’

Published Thu, May 2 202412:55 PM EDTUpdated Thu, May 2 20242:14 PM EDT

Cracks might finally be forming in the Federal Reserve's firm hawkish stance, according to Fundstrat Global Advisors' Tom Lee. As investors expected, the Fed kept interest rates unchanged Wednesday after the central bank policymakers' two-day meeting. But recent pressures weighing down consumer spending might finally be the driver that forces the Fed's hand, said Lee, who is head of research at Fundstrat. Specifically, he pointed to Starbucks ' disappointing same-store sales in its last quarter. He also noted that rising costs in other areas have simultaneously dragged down household spending. "We're seeing consumers basically have their wallet getting squeezed because auto insurance and homeowners' insurance has really eaten [into] their discretionary dollars," Lee said Thursday on CNBC's " Squawk on the Street ." "That's not really an inflationary signal, so I think the bar is actually being lowered now for the Fed to cut and I think that's something many people picked up." To add to his case, Lee highlighted a comment Fed Chair Jerome Powell made at a press conference on Wednesday afternoon following the rate decision: "We're also prepared to respond to an unexpected weakening in the labor market," Powell said. Investors will get some insight on that front Friday morning when the April jobs report is released. All in all, Lee thinks there's a "good probability" that interest rates are currently at their peak. If inflation does indeed improve in the next few months and interest rates fall, he has optimistic prospects for stocks. "It's all going to come down to whether inflation improves in the next couple of months or the rest of the year," he said. "And if it does, a lot of these clouds lift and I think markets actually do quite well." Such an environment will be especially conducive for small-cap stocks, which he thinks will lead the market in the second half of the year. However, Lee noted that he's still bullish on the technology sector due to artificial intelligence-related tail winds.