Why you should buy stocks ahead of next week's inflation report

• Investors should buy stocks ahead of next week's release of the April CPI report, according to Fundstrat's Tom Lee.
• He said the setup appears favorable for higher stock prices as disinflation makes progress.
• An in-line CPI report or better would increase the chances of three interest rate cuts this year, Lee said.

Investors should buy stocks ahead of next week's release of the April CPI report, according to Fundstrat's Tom Lee.

Lee said in a note on Friday that the "buy in May" trade is still in full force after the S&P 500 jumped nearly 4% so far this month.

Lee expects those gains to continue with the upcoming April CPI report likely to show disinflation progress, which would push stocks higher as investors shift to pricing in more than two interest rate cuts from the Federal Reserve this year.

"We think an 'in-line' April CPI will cause the number of Fed cuts to rise from ~1.8 (by year-end 2024) towards 2.5 cuts or more," Lee said. "The rationale, in our view, is that this April CPI will highlight the possibility that auto insurance's disproportionate impact on CPI is ebbing."

Economists expect the April Consumer Price Index, set to be released Wednesday morning, to be up 0.31%. 

Lee said his bullish short-term outlook is corroborated by ongoing declines in the volatility index, the US dollar, and long-term interest rates. It also doesn't hurt that other central banks are beginning to cut interest rates.

Sweden's Riskbank cut interest rates for the first time since 2016 on Wednesday, and the Bank of England signaled that interest rate cuts are imminent. 

"Bottom line, we are still 'buy in May.' The fact that stocks rose this week is a positive signal. And next week, we expect incoming data to show overall softening of the key components of inflation," Lee said.