Tom Lee: The Most Hawkish Fed is a Bullish Trading Structure

Tom Lee, head of research at Fundstrat, stated that the most hawkish Federal Reserve represents a bullish trading structure. In his comments following a 25 basis point rate hike, he described Chairman Kevin Warsh's press conference as "peak hawkish" and interpreted Thursday's stock market rebound as a confirmation of this structure, suggesting it is favorable as we approach the end of the month.

The Federal Open Market Committee raised rates by 25 basis points this week, with the economic projections summary indicating a median path of two more rate hikes by 2026. Lee had previously believed that the rate hike would eliminate uncertainty regarding future hikes, benefiting Treasury yields and risk assets; however, he later revised his stance, stating that the sharp rebound was merely delayed, and marginally dovish data may emerge, including a potential downward revision of about 0.4 percentage points for the core personal consumption expenditures at the end of the month, as well as other committee members downplaying the chairman's tone. Technically, he noted that the waterfall decline coincided with a rebound in the relative strength index, stating that similar combinations in August had previously led to rebounds. The S&P 500 had already experienced consecutive declines before the meeting, with futures turning positive on Thursday.

He still sees the S&P 500 above 8200 by year-end, citing reasons such as earnings not peaking, a potential recovery in depressed housing investment that could add about $30 to $50 to earnings per share, and the ongoing nature of AI trading. Goldman Sachs had previously estimated that temporary factors such as portfolio fees, flash storage, tariffs, and energy had collectively raised personal consumption expenditures by about 1.7 percentage points, which he used to argue that rate hikes are not necessary. Lee also serves as chairman of Bitmine and has publicly expressed a bullish outlook on cryptocurrencies over the next twelve months.

He defines "extreme hawkishness" as fully pricing in tightening expectations at once, shifting the market from guessing the next rate hike to trading on expectation differentials. The waterfall decline provides an entry point, and the rebound is framed as structurally valid rather than a policy shift to dovishness. The dot plot remains tight, and his bullish stance relies on subsequent data and methodological adjustments rather than an immediate reversal by the committee.

In terms of market mechanics, this translates the impact of rate hikes into a rebound trade after a position cleanout: buying growth stocks and crypto beta that have been hit hard, while selling long-duration shorts extrapolated linearly from the dot plot. Beneficiaries are equity accounts that have reduced leverage during the waterfall and are prepared to catch the rebound; those under pressure are housing and leveraged mergers that must be repriced at higher policy rates. If other committee members do not retract their hawkish language, the structure will merely be a rebound rather than a trend.

Additionally, Lee had warned mid-year that a bear market-like shift could occur in the second half, juxtaposed with the current "peak hawkish is bullish" sentiment. The trade is on the rhythm of expectation differentials, not a denial of the rate hikes themselves.

Source: Public Information