FOMC could trigger a very big rally in equities, says Fundstrat's Tom Lee

Tom Lee’s view is tactically bullish but highly dependent on the Fed’s communication, not simply the rate decision itself. Fundstrat’s positioning was that equities could rise even after a 25-basis-point hike, with a larger rally if the FOMC leaves rates unchanged. That implies the market may already be discounting a restrictive-policy outcome, creating scope for a “relief” move if the announcement or guidance is less hawkish than feared.

Market mechanism:

• A fully priced 25bp hike: The initial reaction could be positive if the Fed signals that the move is isolated or that further tightening is unlikely. Falling front-end Treasury yields would support equity valuations, particularly long-duration technology and other growth stocks.
• No hike: This would likely be interpreted as a dovish surprise if investors had been positioned for tightening. The most direct beneficiaries would be the Nasdaq, software, semiconductors, small caps and other rate-sensitive segments.
• Hawkish guidance despite the decision: This is the principal downside risk. A higher projected terminal rate, renewed emphasis on inflation, or resistance to future easing could push two-year yields and the dollar higher, compressing equity multiples and limiting any rally.

The bullish interpretation is therefore less about the absolute level of rates and more about a reduction in policy uncertainty and the risk premium embedded in equities. A dovish outcome could also weaken the dollar and support gold, crypto assets and emerging-market risk through easier financial conditions. Conversely, a jump in real yields would be negative for those assets.

The rally would be more durable if it broadened beyond megacap technology into financials, industrials, small caps and cyclical sectors. A narrow advance concentrated in high-duration technology would suggest that the move is primarily a bond-yield trade rather than confirmation of stronger economic expectations.

Traders should focus on the statement, economic projections, rate path, press-conference tone and the reaction of two-year Treasury yields and the dollar, rather than the headline decision alone. Subsequent inflation and labor-market data remain critical: a dovish Fed that later faces persistent inflation could generate only a short-lived equity rally, while a softer growth backdrop could eventually turn an initially bullish policy reaction into a bearish earnings signal.