The S&P 500 could surge 14% through year-end as the Fed tames inflation and pieces come together for a big December rally, Fundstrat's Tom Lee says

• The S&P 500 could rally another 14% by the end of the year as inflation continues to cool, Fundstrat says.
• Another weak CPI reading for November could cause the Fed to be less aggressive.

The S&P 500 could rise another 14% through the end of the year as inflation comes down and sets the stage for a big December rally, according to Fundstrat's Tom Lee.

As long as inflation shows signs of cooling again in November, Lee believes the next leg higher for the benchmark index could be to 4,500.

"[The] Fed no longer has its 'back to the wall' on inflation as October CPI beat looks repeatable and the cause for a pause after December is stronger," Lee said in a note on Monday, referring to October inflation clocking in below consensus estimates at 7.7%.

That's a major sign that the Federal Reserve's tightening efforts are starting to yield results, and could prompt the central bank to pause aggressive rate hikes early next year. Indeed, a pause in rate hikes after December would drive another move higher of up to 25%, Lee said in the note.

Markets have been eyeing a Fed pause as a precursor to a major rally, as aggressive rate hikes from the central bank have weighed heavily on stocks this year. The prospects of softening monetary policy makes the case for owning stocks "the strongest now than it has been in all of 2022," Lee said, pointing to the rally in June, when stocks jumped on false hope of a Fed pivot. Stocks rose for 23 days, with the S&P 500 gaining 16%.

"We believe this 'Fed pause' rally should last closer to 50 days and push the S&P 500 25% higher," Lee said. A rally in stocks began 20 days ago, which translates to a 14% gain to stocks from today.

Lee has remained bullish amid a rough year for stocks, previously predicting that the S&P 500 would reach a new all-time high before revising his target downward. He previously said that the last few weeks were a "game changer" for stocks, due to indicators like the softer CPI report, lowered bond volatility, a fall in the US dollar, and relatively stable gains in the S&P 500 despite turmoil in crypto markets.