Fundstrat's Tom Lee slashed his earnings estimates for the market, but remained bullish on FANG stocks due to their strong growth rates.
FANG is an acronym created by CNBC's Jim Cramer for a basket of high-growth technology stocks — Facebook, Amazon, Netflix and Google parent Alphabet.
"As we approach mid-year, we are revising [2017 and 2018 earnings] to reflect weaker inflation, flattening yield curve, rising labor costs and 'pushed out' timing of White House agenda," Lee wrote in a note to clients Friday. "Investors argued low inflation [is] good for stocks via multiple (higher P/E) — this ignores developing profit margin squeeze, as unit labor costs rise."
The strategist lowered his S&P 500 earnings-per-share forecast for 2017 to $127.50 from $134.63. He also reduced his estimate for 2018 to $138 from $146.63.
In a lower profit environment, Lee recommended investors "focus on higher EPS growers" such as FANG stocks.
"You want to buy secular growth which is FANG," Lee said on CNBC's "Halftime Report" Friday. "I think the business cycle is a little out of whack. Capacity utilization is still low … The only thing a little tight is the labor market. So we have labor inflation coming."
Lee reaffirmed his year-end 2,275 price target for the S&P 500, representing 7 percent downside from Thursday's close. The forecast ranks as the lowest target on Wall Street, according to CNBC's Market Strategist Survey.