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- Corporate greed drove inflation higher in January, according to Fundstrat's Tom Lee.
- But inflation as a whole is dropping,
- Lee sees the S&P 500 hitting 5,500 by the end of this year, a 16% gain for the full year.
Corporate greed is the reason why inflation was hotter than expected to start the year, according to Fundstrat's head of research Tom Lee.
Speaking to CNBC on Friday, Lee pointed to the slight uptick in January consumer inflation, with prices rising 3.1% year-over-year. PCE inflation, the Fed's preferred inflation measure, rose 2.4%, in line with economists' estimates.
That's fueled some fear that inflation could be poised for a resurgence, which would prompt the Federal Reserve to push back its timeline for rate cuts. But the main drivers of inflation have been dropping, Lee said. Core inflation is "basically" already at the Fed's 2% price target, he noted.
That suggests the hotter-than-expected inflation reading to start 2024 was likely due to corporate "greedflation," or simply, businesses hiking prices because they're able to.
"The arching reality is that inflation is falling ... A lot of companies raise prices in the month of January and it doesn't get captured," Lee said. "January and February tend to have that high, what they call residual seasonality," he added.
The underlying message is that investors can still breathe easy, as inflation is still on the decline and the Fed is still on track to lower interest rates this year. Despite rising talk of no rate cuts in 2024, markets see a 50% chance rates are lowered by at least 100 basis points by December, according to the CME FedWatch tool.
"I think if there are no cuts this year, the stock market has to reassess what it's thinking in terms of the trajectory of inflation, the probability of a soft-landing, and of course, all these things would weigh on what would happen to multiples," Lee warned.
Lee though, who nailed his stock market outlook in 2023, is forecasting another positive year for stocks. Previously, he said the S&P 500 could soar as high as 5,500 by year-end, implying a gain of about 16% for the year.