Tom Lee explains the market reaction to the Fed's decision. He favors these sectors

Published Thu, Dec 16 20211:39 PM ESTUpdated Thu, Dec 16 20214:08 PM EST

Investors are digesting the Federal Reserve's decision to sharply curtail its bond-buying program , but market bull Tom Lee said he's sticking with his 4,800 end-of-year target on the S & P 500. On Wednesday, Fed Chair Jerome Powell announced a more aggressive plan to wind down its asset purchases and hike rates in 2022. Fundstrat Global Advisors' Lee said he sees the central bank's rationale for changing its view marks an economy that's "normalizing, with demand shocks fading and supply shocks fading," in an interview with CNBC's " Halftime Report " Thursday. He added that the Fed could walk back this framework if the risks of the delta, omicron and future variants of Covid-19 prove to be more harmful to the economy than expected, which provides some comfort to investors. "That's a template the market understands and agrees with and doesn't think there's policy error [in]," Lee said. "It's a risk-on roadmap [Powell] provided because it's saying: look, unless delta, omicron and other variants don't change trajectory, the Fed could be tightening, but that's sort of what the market wants, a Fed that still has the market's back." He continued: "The market wants the Fed to be a bit of an inflation watcher and that's very clearly stated. So if inflation is not going to track worse than expected, then the Fed doesn't have to act faster. If we have this looming uncertainty because of these variants and the transmissibility, that's going to create uncertainty that keeps the Fed a little more dovish." Inflation-sensitive sector plays and the road ahead It's a good time to be owning inflation-sensitive stocks, said Lee. He noted he would steer clear of stocks with "fake price increases because of supply shortages," like core goods, but cited sectors with structural shortages and growing economies, like oil. Eventually, demand for oil will recover and business travel demand will recover with it, he said. "That's a price support for oil, especially with oil production," Lee said. "The energy stocks are trading a huge gap to that and you can see the resilience because as soon as the Fed Band-Aid was ripped off, we've had a big move in these names, so I like energy stocks." Lee also added he likes financial, industrial and FAANG stocks, though he didn't name any in the first two sectors. Tech stocks surged Wednesday after the Fed's decision, leading the Nasdaq to a 2% gain for the session. On Thursday, Lee told CNBC that investors with a medium- to long-term view could still find good opportunities in high-growth, high-value stocks, noting that "a lot of innovation is coming." "If your time frame is three, five years, I agree with Cathie Wood's view that there's exponential growth coming," he said, referring to the CEO of innovation-focused ARK Invest. However, "in a world where people are focused on antivirals and Fed tightening, these aren't really names people put in their shelf."

Tom Lee, Fundstrat Global Advisors

Scott Mlyn | CNBC

Investors are digesting the Federal Reserve's decision to sharply curtail its bond-buying program, but market bull Tom Lee said he's sticking with his 4,800 end-of-year target on the S&P 500.