Tom Lee’s 2026 Market Call: Double-Digit Gains?
Audio Brief
Show transcript
This episode covers Tom Lee's bullish S&P 500 outlook for 2026, driven by historical precedents and key market drivers.
There are three key takeaways. First, look beyond headline valuations at the equal-weight S&P 500. Second, prepare for potential first-half volatility. Third, stay focused on long-term secular growth themes like AI.
Headline S&P 500 valuations are skewed by mega-cap tech. The equal-weight S&P 500, with a 17x P/E, shows the broader market is reasonably valued, even lower than five years ago.
While the overall outlook is bullish, significant uncertainty could lead to a precarious first half of 2026. This potential volatility may offer buying opportunities for conviction-driven investors.
Long-term secular growth trends, especially Artificial Intelligence, remain powerful market drivers. These themes are crucial for capturing growth, as their valuations are not yet stretched.
These insights suggest a resilient market environment despite potential near-term fluctuations.
Episode Overview
- Tom Lee's bullish market outlook for 2026, predicting a potential fourth consecutive year of double-digit returns for the S&P 500.
- Analysis of historical market data, which suggests that a fourth strong year is not unprecedented after a three-year bull run.
- Discussion of key market drivers, including reasonable valuations (especially in the equal-weight S&P 500), a dovish Fed, and the ongoing AI revolution.
- An exploration of six "market blessings" from 2025 that are expected to carry over and fuel the market rally into 2026.
Key Concepts
- The Fourth Year Bull Market: The episode explores the historical precedent for a strong market performance in the fourth year following a three-year streak of 20%+ gains. Historically, 50% of the time, the fourth year's returns are even stronger.
- Equal-Weight vs. Market-Cap Valuations: Tom Lee argues the market isn't as expensive as perceived. The market-cap weighted S&P 500 is skewed by a few large tech stocks, while the equal-weight S&P 500 shows a more reasonable P/E ratio of 17x, which is lower than it was five years ago.
- Market Resilience: A key positive signal is the market's demonstrated strength in surviving seven distinct corrections during 2025, indicating a resilient underlying structure.
- Secular Growth Themes: Long-term drivers like the multi-decade theme of Artificial Intelligence (AI) and a resurgent crypto market are presented as significant tailwinds for continued growth.
- Favorable Macroeconomic Setup: The outlook is supported by a combination of falling inflation, a dovish Federal Reserve, and surprisingly negative investor sentiment (a "wall of worry"), which provides fuel for a continued rally.
Quotes
- At 00:41 - "The equal weight S&P 500 PE is 17 times. It's lower than it was five years ago." - Tom Lee explains that when you remove the heavy weighting of mega-cap tech stocks, the broader market valuation appears much more reasonable.
- At 01:20 - "Tom Lee is saying that the volatility in the first half of 2026 might be elevated, and that may lead to a very precarious first half of 2026." - The host summarizes Lee's warning that despite a bullish overall outlook, the year may start with significant uncertainty and market swings.
- At 02:38 - "Bull market survived 7 corrections in 2025 = resilience." - The host shares a key point from Fundstrat's research, highlighting the market's underlying strength as a positive factor heading into the new year.
Takeaways
- Look Beyond Headline Valuations: Don't be deterred by the high P/E ratio of the market-cap weighted S&P 500. Analyze the equal-weight index (like RSP) to get a clearer picture of the broader market's valuation, which may reveal more attractive opportunities.
- Prepare for First-Half Volatility: Expect a potentially rocky start to 2026 due to uncertainty surrounding the Fed and the durability of the bull market. This volatility could present buying opportunities for long-term investors who maintain conviction.
- Stay Focused on Long-Term Themes: Despite short-term market fluctuations, secular growth trends like Artificial Intelligence remain powerful drivers. Maintaining exposure to these areas is crucial for capturing long-term growth, as their valuations are not yet considered stretched compared to historical tech booms.
