Tom Lee: New Year, New Portfolio Strategy?

Episode Overview

• The panel discusses the market outlook for 2026, following strong double-digit returns in 2023, 2024, and 2025.
• Experts debate whether the market will see another year of double-digit gains or if returns will moderate to high single digits.
• The conversation covers key market drivers, including economic fundamentals, Federal Reserve policy, political uncertainty, and the ongoing AI trade.
• The discussion highlights the "broadening out" of the market, with sectors like financials, industrials, and small caps showing significant strength beyond the Magnificent Seven.

Key Concepts

• Historical Performance: The panel notes that historically, after three consecutive years of strong market gains, the following year often performs even better, suggesting potential for continued upside.
• Market Volatility: Experts anticipate increased volatility in the first half of 2026, driven by factors such as potential changes to Trump-era tariffs, an extended government shutdown, and the controversial nomination process for a new Federal Reserve Chair.
• Economic Fundamentals: The underlying economy is seen as being on solid footing, supported by encouraging jobs data, moderating inflation, and strong loan growth, which is at a nine-week high and signals bullish economic activity.
• Market Broadening: The rally is expanding beyond big tech. Small-cap (IWM) and mid-cap (MDY) ETFs are showing strong year-to-date performance, alongside sectors like healthcare (XLV), financials (XLF), and industrials (XLI).
• Valuation Debate: While some experts argue that risk is expensively priced, others contend that valuations are reasonable, especially for the equal-weighted S&P 500, which has de-rated over the last five years.
• AI Trade Dynamics: There is an ongoing debate about the AI trade. Some believe the current approach is on a credible path to general AI, justifying high investment, while others see it as a potential dead end without new architecture, making current capital expenditures seem premature.

Quotes

• At 00:32 - "I think it's still possible to have a double-digit year." - Tom Lee gives his optimistic forecast for the S&P 500's performance in 2026.
• At 02:26 - "I think high single digits is reasonable... Single." - Chris Harvey provides a more cautious outlook, predicting more moderate gains for the market in 2026.
• At 04:23 - "Fundamentals at the end of the day, they run the show. And if you do have an economy that grows two and a half, three percent... typically that's been a 10% earnings growth." - Stephanie Link emphasizes that a solid economic backdrop will continue to support corporate earnings and market performance.

Takeaways

• Prepare for significant market volatility in the first half of 2026 due to political and economic uncertainties, requiring careful portfolio management.
• Look for opportunities beyond the big tech names, as the market is showing a "broadening out" trend with strong performance in financials, industrials, and small caps.
• Despite concerns about a tech bubble, focus on companies with strong fundamentals and reasonable valuations, as many, including banks leveraging AI, are positioned for growth.