Tom Lee's Contrarian Call: Why the Most Hawkish Fed Sets Up a Rally

In Fundstrat Capital's video update for the week of September 21, chief investment officer Tom Lee puts two things in one frame: the family of Granny Shots ETFs and the September FOMC decision that rattled a choppy September. As of the September 18 close, the large-cap Granny Shots (GRNY) stood at $27.88 with $4.475 billion in assets, the mid-cap Granny J (GRNJ) at $28.96 with more than $485 million, and the income-focused Granny Income (GRNI) at $21.12 with $59 million. The tension, Lee says, comes from the first Fed hike in three years arriving in the middle of a sideways tape — in his words, Chair Walsh chose violence.

Weekly and year-to-date scorecards: 40-basis-point gaps

Over the last week GRNY rose 0.35% while the S&P 500 was flat for about 40 basis points of outperformance; GRNJ fell 0.57% versus a 1.39% drop for the Russell 2500 for roughly 82 basis points of relative outperformance; the income basket gained 0.39% against a flat S&P for about 45 basis points ahead. Year-to-date GRNY is up 12.77% versus 12.71% for the S&P 500 — 6 basis points ahead — while GRNJ at 13.5% trails the Russell 2500's 17.3% by 378 basis points and the income basket at 11.74% trails the S&P's 12.71% by 97 basis points. The numbers are not headlines; they are the footing for Lee's broader thesis that large-cap keeps pace while mid-cap lags yet still beats its benchmark on the week.

From June into September: breakout, then chop again

The macro story is a tape that churned from June into August, broke out in August to new highs, then chopped again in September. Lee reminds that investors dislike grind more than straight declines, and the FOMC's first hike in three years landed right in that grind. Walsh offered three reasons; Lee answers each with a separate disinflation argument and steers the debate toward where inflation actually comes from.

Reason one was a stronger economy. Lee says strong growth does not automatically mean inflation and reaches for the Cleveland Fed's note from almost 30 years ago: growth and rising employment do not by themselves threaten the Fed's legitimate role in protecting the purchasing power of money, and a booming economy can coexist with stable prices. He adds the Kansas City Fed's line from earlier this year — supply-led growth, possibly from productivity advances, can lift output while lowering inflation, a disinflationary winning combination. He even recalls Walsh's own line as governor: watch inflation, growth by itself does not require a hike. The chain leaves reason one looking oddly thin.

Reason two was that summer inflation was not converging toward 2% clearly and fast enough. Lee's pushback is calendar-based. The Bureau of Economic Analysis on September 30 will publish its annual update to the national accounts and revise the PCE methodology, which many economists estimate could shave 20 to 40 basis points off year-over-year inflation on its own — a meaningful move from 3.4% toward 3%. Goldman Sachs, he notes, highlighted four one-off factors that could fade by about 100 basis points in six months. In Lee's reading the Fed turned hawkish without pricing in that window, so the speed test on the 2% goal was judged without the methodology lens.

Details of those four one-offs get special emphasis. Asset-management fees counted as inflation when markets rise even though quantity is unchanged, a flash-memory spike showing up in software and accessories at nine standard deviations, plus geopolitical and tariff effects — all lift the print but are not persistent. Goldman's companion projection that core CPI, less affected by these measurement issues, would fall to 2.6% by December 2026 and 2.2% by December 2027 fits the same fade thesis. For Lee the 100-basis-point unwind will happen before the six-month lag of the new hikes is even felt.

Reason three: oil is a supply shock; policy arrives after

Reason three was geopolitics and oil. Lee borrows Chair Powell's own framework: an energy shock is a supply shock and monetary tools have little meaningful near-term effect on supply; they work with long and variable lags. Shocks tend to come and go, while the drag from tightening arrives later and weighs at the wrong time. The textbook learning is to look through energy shocks; hiking today for oil risks leaning on the economy after the shock has faded. Geopolitical worry is understandable, Lee says, but not a rate-treatable item.

The contrarian six: peak hawkishness meets oversold

From there Lee builds his contrarian case that the hike sets up a rally across six points. First, the Fed cannot get more hawkish — we are at peak hawkish and incremental data should turn more dovish. Fed speak in coming weeks will show many officials walking back the four-week sprint from neutral to hawkish. Second, the September 30 core PCE print on the new methodology could show 3.4% dropping toward near 3%, a discrete market catalyst. Third, the September jobs report in early October clarifies again. Fourth, President Trump's muted response — a sharp contrast to the 'too late' label he gave Powell — reads as a signal that the Fed wanted to be seen as max hawkish. Fifth and sixth are technical: 25 plus a possible 25 is 50 basis points, not enough to kill the economy or the equity market, and the tape is already oversold after a waterfall drop even as relative strength rises — the same setup that preceded August's bounce. Add earnings, with Costco, a Granny holding, reporting next week, and Lee sees a compression ready to resolve up.

Stock and theme scorecards round out the frame. Inside GRNY the week's top five featured crypto-linked Strategy and Robinhood while the bottom five included AI names and rate-sensitive financials hurt by the hike; inside GRNJ biotech leadership and crypto name RIOT sat in the top five with the bottom five shown on screen. At the theme level the aggregate was relatively flat — the market digesting the new rate path. Lee's close is clear: a turbulent September plus peak hawkishness that will ease as methodology does the work leaves a positive risk/reward window.