Bull markets don't peak when investors are this bearish, says Fundstrat's Tom Lee
Stocks may surge over the coming days.
The S&P 500 has just registered a four-day losing streak. By Thursday's close it sat 2.7% shy of the record high hit last month, hobbled by a global bond-market selloff that's pushed U.S. benchmark borrowing rates to the brink of 5%.
Resurgent oil prices are adding to fears of inflation, and so, with a Federal Reserve interest-rate decision coming next week, Friday's release of U.S. consumer-price-index data for August is keenly anticipated.
But amid the tension, strategist Tom Lee thinks the CPI update will be one of four factors that may trigger a "face-ripper rally" for stocks.
In commentary published late Thursday, Lee, the usually bullish head of research at Fundstrat, addressed the inflation issue head on, stating that the CPI report "could surprise to the downside," solidifying the case for the Fed to stand pat on Wednesday.
In the event, the report pretty much matched expectations, and so far stock futures show the market absorbing the print with little fuss to trade near session highs.
Ahead of the CPI news, federal-fund futures were pricing in a two-thirds chance that the U.S. central bank will raise rates by 25 basis points to a range of 3.75% to 4%. So a softer-than-expected inflation print might have allowed the Fed to pause, which would represent "a positive surprise," as fed-funds futures show multiple hikes being priced in, said Lee.
In any event, even if Kevin Warsh, the Fed chair, and his colleagues do decide to raise rates on Sept. 16, Lee thinks there's little chance of further monetary tightening for the rest of the year. Indeed, Lee contends that many in the market are confounded by what seems to be a hawkish turn in tone from some Fed officials, and he implies that such rhetoric doesn't really mesh with likely policy trajectory.
"Thus," he said, "this is a positive set-up" for next week's interest-rate decision.
A third reason for an imminent equity surge is that investor sentiment "has become solidly bearish," according to Lee. Unlike the rallies of 2024 and 2025, where surveys by the American Association of Individual Investors showed respondents turning net bullish, investors have remained staunchly bearish in 2026, he noted.
Investors are never bearish at the top of a bull market, Lee contends. "Thus, we argue we are not near a near-term top, yet," he said.
Lee's final reason that stocks may bounce from here is that, as noted above, the market has been down four days in a row, hit by high oil prices and rising Treasury yields. "While this remains problematic," Lee argued, "the U.S. consumer is not at the breaking point from these higher oil prices."
Lee accepts that his bullishness right now is a contrarian posture, particularly as many investors remain cautious about the usually weak September stock market. "But we believe it is this exact cautiousness, particularly the fact that many cite seasonals, as the reason to think a lot of bad news is priced in," he said.
And he added: "As many sage investors have said, 'markets bottom on bad news' - so, Friday will be the test. But our take is that Friday will see the start of a face-ripper rally."
Lee is fond of the phrase. MarketWatch wrote in March 2025 that he thought such a market surge had begun. But his timing was wrong. Within about 10 days the S&P 500 had shed nearly 14% as stocks swooned following the "liberation day" tariff announcement at the start of April. Still, by the end of 2025, the market had moved significantly higher from when Lee made his call.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is little changed, as oil futures (CL.1) slide and gold futures (GC00) trade around $4,395 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7591.7 -2.01% -2.66% 10.90% 15.24% Nasdaq Composite 26,081.72 -1.89% -2.69% 12.22% 18.32% 10-year Treasury 4.945 15.60 24.80 77.30 87.50 Gold 4385.7 -2.04% -1.04% 1.23% 19.15% Oil 100.06 9.69% 21.43% 74.29% 59.84% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
The U.S. headline annual consumer-price index for August rose 3.4%, the same as in July, and matching economists forecasts.
The average U.S. retail diesel price rose above $6 per gallon, the highest on record, according to AAA.
Anthropic says it blocked possible attempts to use artificial intelligence to develop bioweapons.
Oracle shares (ORCL) are jumping after the cloud and software giant tweaked its forecasts higher and sent an upbeat signal about future business.
Kroger $(KR)$ shares are lower after the grocer trimmed is sales guidance.
Other U.S. economic data due Friday include the preliminary University of Michigan consumer-sentiment survey for September, released at 10 a.m. Eastern.
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The chart
Amid the rising angst over the sovereign-debt selloff, global investors are buying a greater than usual amount of bond funds. Goldman Sachs portfolio strategists led by Christian Mueller-Glissmann present the chart showing that flows into global bond funds this month are well above the median level. U.S. fixed-income fund flows have been strong, particularly into short-term government bond funds, they say.
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