A surge in bond yields 'isn't an equity killer' and stocks will still finish 2021 higher, says Fundstrat's Tom Lee

• Fundstrat's Tom Lee sees US stocks able to resume their rally even as bond yields climb, he told CNBC.
• He said his previous 'everything rally' call is being put to the test as stocks sank on Tuesday.
• Tech stocks tumbled as the 10-year Treasury yield pushed past 1.5%.

Bond yields are rapidly rising, but stocks can still continue to climb through the end of 2021, Fundstrat's Tom Lee said on CNBC on Tuesday.

The bullish remarks coincided with a sharp stock market selloff as the closely watched 10-year Treasury yield leapt to 1.56%, highest in three months. But Lee downplayed the spike, calling the rate a "headline number," while pointing to positive reasons for yields to climb.

"If the economy is expanding and strengthening and there's pent-up demand and shortages and that causes reflation and higher rates - that's obviously very good earnings. It's good for return on invested capital, and it means higher interest rates," Lee said.

"But that's exactly the environment from 1950 to 1970. I think anybody who really studies markets would understand rising rates isn't an equity market killer," he said in an appearance on the business-news channel.

The 10-year yield's climb hit the tech-concentrated Nasdaq 100 particularly hard, pushing the index down by 2.5% during Tuesday's session and extending its loss into a second day.

The high-growth group of stocks, including Amazon and Facebook, led the market decline, with investors seeing tech companies as top beneficiaries of low interest rates that can fuel expansion in their businesses.

A spike up in yields this week was stoked in part by Federal Reserve Chairman Jerome Powell's warning that global supply chain disruptions, a tight labor market, and other factors could keep inflation higher longer than anticipated. Higher inflation could prompt the Fed to raise its benchmark interest rates from near-zero levels sooner than investors expect.

Lee in August projected that US stocks could undergo an "everything rally" if COVID-19 cases retreated this fall.

The rally projection was "really being put to the test" on Tuesday, said Lee. "I think that there's been a lot of damage done to like the growth and the tech trade and the S&P technicals. But to me, this just seems like a precursor to a consolidation before a big move higher," he said. "I'm still strong in the camp that we would have everything rally into the year-end."