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The release of the June consumer price index report Thursday morning will be a "reckoning" for investors who expect a second wave of inflation.
That's according to Fundstrat's Tom Lee, who told clients in a video this week that he expects the June CPI report will show that inflation is "dropping like a rock," and that should lead to a higher stock market and increased probabilities of more than two interest rate cuts from the Federal Reserve this year.
"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 said.
Lee highlighted that recent conversations with Fundstrat's client base mostly fall into three categories: investors who expect a second wave of inflation, investors who expect the Fed to cut rates because of a weakening economy and not because of tamed inflation, and investors who see a growing risk of a hard landing in the economy.
"But there's a fourth view, which is our view, and it's not a widely held view, but that inflation is falling like a rock and so Fed cuts are good, and that's positive for stocks," Lee said.
"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.
The monthly CPI reports have sparked week-long stock market rallies in December, April, and May, when inflation showed signs of cooling faster than economists' estimates.
Economists estimate Core CPI rose 0.21% month-over-month in June, but Lee believes any reading below 0.25% would help push stock prices higher.
"Anything below 0.25% is a positive," Lee said, arguing that a 0.20% to 0.25% would be a lower CPI reading over the past year apart from May's 0.16% reading.
"It would just affirm that inflation is falling like a rock," Lee said. "I think the number of expected cuts will exceed two."
"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 said.
What's working, according to Lee, are stocks related to AI, weight loss drugs, the financial sector, and bitcoin and proxies, like exchanges. Lee is also bullish on small-cap stocks, which have badly lagged the broader stock market rally so far this year.
JPMorgan's trading desk also expects a light June CPI report will boost stock prices.
In a note on Tuesday, the bank said the most likely scenario, at a 35% probability, is for inflation to see a month-over-month increase of between 0.15% and 0.20%, which would likely drive the stock market higher by between 0.50% and 1%.
"We have had multiple former Fed governors suggest that September is appropriate for a cut," JPMorgan's Andrew Tyler said. "With this in mind, we remain tactically bullish, but with slightly less conviction."
