Tom Lee Predicts 'Reckoning Week' as June CPI Report Signals Major Rate Cuts and Stock Market Surge

The highly anticipated release of the June Consumer Price Index (CPI) report on Thursday morning is expected to bring a "reckoning" for investors, according to Fundstrat's Tom Lee. Lee predicts that the report will reveal a dramatic drop in inflation, which could catalyze a significant shift in the Federal Reserve's interest rate policy and propel the stock market higher.

"It's going to be a week of reckoning, and I mean a reckoning of how people view inflation and the state of the economy," Lee declared in a recent video to Fundstrat clients. He anticipates that the June CPI report will show inflation "dropping like a rock," prompting the Fed to implement more than two interest rate cuts this year.

Lee's outlook diverges from the prevailing sentiment among investors, who he categorizes into three main groups: those expecting a second wave of inflation, those anticipating Fed rate cuts due to a weakening economy, and those fearing an imminent hard landing. However, Lee introduces a fourth perspective, unique to Fundstrat, which posits that plummeting inflation will lead to beneficial rate cuts and a bullish stock market.

"I think there's a good chance that if the data plays out the way we think it is this week, there's more people moving into this camp," Lee added, forecasting a shift towards his optimistic view.

Historical trends bolster Lee's prediction, with previous CPI reports in December, April, and May triggering stock market rallies as inflation cooled faster than anticipated. Economists currently estimate Core CPI to have risen by 0.21% month-over-month in June. Lee suggests that any reading below 0.25% would be favorable for stock prices.

Anything below 0.25% is a positive," Lee emphasized, noting that a 0.20% to 0.25% reading would signify a notable decrease in inflation, reinforcing the narrative that it is "falling like a rock." He anticipates this outcome will exceed the expectation of two rate cuts, further boosting stock markets.

"If June CPI comes in soft, I think this number [of expected rate cuts] goes higher, and that's good for stocks, so we want to stay on target and stick with what's working," Lee advised. He highlighted stocks related to AI, weight loss drugs, the financial sector, and bitcoin as particularly promising, alongside small-cap stocks which have lagged behind this year's broader market rally.

Adding weight to Lee's forecast, JPMorgan's trading desk also expects a light June CPI report to uplift stock prices. The bank's note on Tuesday projected a 35% probability of inflation rising between 0.15% and 0.20% month-over-month, a scenario likely to drive the stock market up by 0.50% to 1%.

"We have had multiple former Fed governors suggest that September is appropriate for a cut," noted JPMorgan's Andrew Tyler, aligning with Lee's optimistic view. "With this in mind, we remain tactically bullish, but with slightly less conviction."

As the financial world braces for Thursday's CPI report, all eyes will be on the numbers that could redefine the trajectory of inflation, interest rates, and market dynamics for the remainder of the year.