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A flattening yield curve could spell trouble for stocks, Tom Lee says

The market may have greatly surpassed expectations, but a flattening yield curve may be hinting at oncoming weakness for stocks, Fundstrat's Tom Lee told CNBC on Thursday.

"The yield curve tells us what you can expect for making long-term investments. When it flattens, it's telling us that incremental returns for businesses is declining," Lee told "Squawk on the Street."

Lee, Fundstrat's managing partner and head of research, said such a flattening "has almost always presaged weakness in equities."

But future weakness doesn't necessarily mean investors should avoid the market, just that they shouldn't overpay, Lee contended.

"You don't want to pay too much, even for quality," he said, adding that one Trump trade is a reliable move for investors looking to buy in.

"I think you can actually make some good bets on deregulation. It's really explained most of the outperformance of some of the sectors year to date," he said.