The 'face-ripper' rally in the stock market will continue as inflation may have just hit a wall, Fundstrat's Tom Lee says

• The stock market is experiencing a "face ripper" rally that isn't going to end anytime soon, according to Fundstrat.
• The S&P 500 and Nasdaq 100 both surged about 2% on Tuesday after the October CPI report.
• "The bigger story seems to be inflation could be hitting a wall," Fundstrat's Tom Lee said.

The stock market is in the midst of a "face ripper" rally that should see follow-through heading into the end of the year, according to Fundstrat's Tom Lee.

Lee told clients in a Tuesday note that the strong rally in stocks on Tuesday, in which the S&P 500 and Nasdaq 100 both jumped 2% and the small-cap Russell 2000 index soared 5%, was driven by October's CPI report which showed that inflation could be "hitting a wall."

The consumer price index was flat in October, below economist expectations of a 0.1% rise. Meanwhile, year-over-year CPI increased 3.2%, below estimates of a 3.3% increase and markedly below the 3.7% rise seen in September. Finally, core CPI rose 0.2% in October, below economist estimates of 0.3%.

"The bigger story seems to be inflation could be 'hitting a wall," Lee said. "Only seven of 31 Core CPI components saw a rise in October. Wow. This should drive a change in both Fed's view of the 'stickiness' of inflation and also the market narrative."

Components of the CPI report that saw a decline in prices included both used and new cars, as well as gasoline. And shelter prices, while up slightly in October, saw a much smaller increase than they did in September. Shelter prices should see a steady decline as the Fed's lagging housing data input begins to reflect on the ground prices in the coming months. 

The cooler inflation report shows steady progress in the Federal Reserve's goal to get inflation back to its long-term 2% target, and it opens the door for the Fed to cut interest rates not because of economic weakness, but because they are content with where inflation has fallen too after it peaked above 9% in June 2022.

That's the "soft-landing" or even "no-landing" economic scenario that would be bullish for risk-on asset prices like stocks.

And Lee expects the strength seen in stocks since late-October to continue into year-end, as investors remain skeptical despite the encouraging economic data.

"I think institutional investors and retail have been fighting this rally," Lee told CNBC on Monday. "You can see it in the put-to-call ratio. The put-to-call ratio today [Monday] hit 1.26. That's an extremely elevated reading, it's been rising the past two weeks."

"It's a pretty bearish tape out there. People are worried about a hard-landing and inflation being sticky," Lee said. "I think people forget that stocks tend to surprise us against what consensus is thinking."

All of those bearish investors should serve as fuel for stocks to move higher as they one-by-one throw in the towel and accept the economic reality that the Fed could reign in inflation without sparking a recession.

To position for the continued upside in the market, Lee recommends investors own the Nasdaq 100 to gain exposure to the mega-cap tech stocks, as well as small-cap stocks via the Russell 2000.