Fundstrat
Fundstrat’s Tom Lee: Why Fed Cuts Could Fuel Growth Without Inflation
9/18/2025, 8:06:23 PM
Economic Summary
- The Federal Reserve remains the dominant force for markets; sustained tighter policy has kept the ISM below 50 for 31 months, prompting corporate caution and muted economic activity. Easing would likely increase corporate confidence and activity, helping revive the labor market.
- Fed easing would be more than a rate cut — it signals corporations to expand. Combined with AI-driven productivity and Wall Street initiatives (e.g., blockchain), this creates a plausible path for stronger growth next year without reigniting inflation, which would be positive for profits and equities.
- Investor sentiment remains notably negative (six consecutive weeks of AAII net bulls less bears negative), which historically hasn’t marked market tops; a sustained flip to positive would be required to signal a durable market peak.
- After the recent FOMC, groups expected to benefit (small caps, cryptocurrencies, financials, and mega-cap growth names) have rallied, with the Russell 2000 approaching potential record highs, reflecting a breadth improvement in the rally.
Bullish
- Fed easing would act as a corporate green light, boosting hiring and investment.
- Growth can recover without fueling inflation thanks to AI-driven productivity gains.
- Risk-on sectors (small caps, financials, crypto, Mag7) are already rallying.
- Sentiment metrics haven’t reached classic complacency levels that mark market tops.
Bearish
- A market pullback is inevitable and could occur from elevated levels.
- Prolonged monetary tightness has suppressed activity (ISM <50), keeping corporate caution.
- Risk of overheating and a sharp downturn similar to 2000–2001 if policy missteps occur.
- Persistently negative investor sentiment could sustain volatility and limit near-term rallies.
People mentioned
Tom LeeDavid TepperScott