Investors should "back up the truck and buy" into the pullback created by a hawkish rate cut by the Federal Reserve and new China tariffs from the Trump administration, Fundstrat's Tom Lee said in a client note Friday.
The Federal Reserve announced its first rate cut since 2008 on Wednesday, lowering its target range for the federal funds rate by 25 basis points, but Chairman Jerome Powell called the move a "midcycle adjustment" that didn't necessarily signal future cuts.
President Donald Trump then escalated the trade dispute with China on Thursday, adding $300 billion in goods to the list of items facing tariffs.
The market dipped after both of these events, with the S&P 500 shedding about 2% of its value between the Tuesday and Thursday market closings.
This combination is creating a trio of supports for equities, according to Lee: a lower yield on 10-year Treasurys, a weaker dollar and increased chance of another rate cut in September.
"We see falling 10-yr and weakening USD and higher odds of a September cut as VERY BULLISH—hence, we strongly urge investors to take advantage of this weakness," Lee said.
The market had priced in a roughly 68% chance of a second rate cut in September before the Fed's announcement, but that had risen to 89% on Friday morning, according to the CME's FedWatch tool. The dollar had strengthened after the interest rate cut but slipped following the tariff announcement.
The Fed cut in particular is "adding gasoline" to the stocks of "asset light" companies, Lee said. Fundstrat listed 16 asset light stocks as overweight, including Rockwell Automation, Qualcomm, Microsoft and Colgate-Palmolive.
Fundstrat also listed several "asset-heavy stocks" as underweight, though Lee said the area should be an attractive investment again in 2020.