Fundstrat’s Tom Lee says a 7-10% correction in S&P 500 is coming

Tom Lee, managing partner and head of research at Fundstrat Global Advisors, said he expects stocks to face a 7% to 10% decline in the next two months, creating the so-called “buy-the-dip” opportunity for investors.

“Investors should be cautious for the next eight weeks. When markets were up seven of the eight months this year, we know it’s an incredibly strong market, but we also have the September [interest-rate] cut and we have the election — things that will get people nervous,” Lee told CNBC’s "Squawk Box".

Lee noted that with increasing concerns about economic growth, key employment data like jobs reports and jobless claims are drawing more attention from the markets. He expects this trend to continue into September.

This week’s nonfarm payrolls report for August is expected to show a solid recovery in job creation, though Lee hopes it won't be overly strong, as that could prompt concerns about the Fed potentially reversing its stance on policy easing.

“I think this jobs report for August is going to show a nice rebound. Hopefully it is not too strong because people are going to worry that the Fed might backpedal on a September cut.”

The August jobs report, due Friday at 8:30 a.m. ET, is expected to provide more clarity on whether the Federal Reserve will proceed with a much-discussed rate cut this month.

Recent inflation data has supported expectations for the Fed to cut rates three times this year by 25 basis points, according to the CME FedWatch Tool. However, should the jobs data point to a significant cooling of the labor market, a more aggressive 50-basis-point cut may still be possible.

Known for correctly predicting last year’s stock market rally, Lee has taken a more cautious stance now that the market is entering its most challenging month. However, he believes that such a downturn will provide investors with a buying opportunity.

“I think in the next eight weeks, people will get a chance to buy,” Lee said. “So I think it’s good to be cautious, but just [be] ready to buy that dip.”

When asked if any potential market turbulence presents a "buy the dip" opportunity, the investor described 1-2% pullbacks as "almost like daily noise." However, he believes a 5% decline is “very likely” in the coming weeks.

“If [the job’s report] is too strong and investors worry and the stock market is down Friday, I’d be buying that dip. But there is a chance that we get a good job’s report and the market is up.”

Regarding election-related trades, Lee pointed out that the weakness in oil prices, despite existing geopolitical risks, suggests that the market may be increasingly betting on a Trump re-election.