Tom Lee: What’s in store for markets in 2026?
Audio Brief
Show transcript
This episode details Fundstrat's Tom Lee's S&P 500 outlook for 2026, targeting 7,700 amidst anticipated market turbulence.
There are three key takeaways from this discussion. First, brace for a volatile 2026, potentially including a bear market phase before finishing strong. Second, focus on the Federal Reserve's leadership transition, as market testing of a new Chair is expected to create significant turbulence. Third, consider diversifying beyond large-cap technology, as market leadership appears to be broadening into other sectors.
Tom Lee forecasts the S&P 500 will reach 7,700 by year-end 2026, a roughly 10% gain from current levels. However, he warns this modest gain masks a very turbulent year, similar to current market conditions. Lee predicts a potential bear market or 20% decline within 2026, followed by a strong recovery to end the year positively.
The appointment of a new Fed Chair is a key concern on the "Wall of Worry" for 2026. The market will likely test this new leadership, potentially causing turbulence through October. A major tailwind for late 2026 is the expected re-establishment of the "Fed Put" as a more dovish Fed chair is confirmed and tested. This shift is anticipated to introduce significant support for stocks.
AI valuations are stretched, and market leadership is showing signs of shifting. Sectors like financials, basic materials, and energy are demonstrating renewed strength. Investors should look to diversify beyond the "Magnificent 7" as this rotation suggests small caps and other value-oriented sectors could present new opportunities.
Despite the anticipated challenges and market turbulence, the year is expected to conclude with overall market gains, driven by a re-established Fed put.
Episode Overview
- Fundstrat's Tom Lee presents his S&P 500 outlook for 2026, targeting 7,700 by year-end.
- Lee anticipates a decelerated but still positive 10% gain for the year, warning it will be turbulent with a potential bear market moment.
- The discussion covers key factors influencing the market, including the appointment of a new Fed Chair, AI valuations, and a potential broadening of market leadership beyond Big Tech.
- Lee identifies several items on the "Wall of Worry" for 2026, such as a new Fed Chair, social unrest, and the potential overturning of tariffs.
Key Concepts
- 2026 S&P Outlook: Tom Lee forecasts the S&P 500 will reach 7,700 by the end of 2026, representing a roughly 10% gain from an expected 7,000 close for the current year.
- Anticipated Turbulence: Lee predicts 2026 will be a "very turbulent year," potentially including a bear market phase (a 20% decline) before finishing strong.
- The "Wall of Worry": Key concerns for 2026 include the market digesting three years of 20% gains, stretched AI valuations, a politically divided nation, the appointment of a new Fed Chair, social unrest, and a Supreme Court decision on tariffs.
- The Fed Put's Return: A major tailwind for the market in late 2026 is expected to be the re-establishment of the "Fed Put," as a new, more dovish Fed chair is confirmed and tested by the market.
- Sector Rotation: The conversation highlights a potential shift in market leadership, with sectors like financials, basic materials, and energy showing strength, while large-cap technology stocks may need to consolidate their gains.
Quotes
- At 00:19 - "I think there's a deceleration of what the market can do next year. But that 10% I think belies what will be a very turbulent year, similar to this year." - Tom Lee explaining that the modest 10% gain masks expected volatility.
- At 00:43 - "I think we could have what looks like a bear market in 2026, but we exit strong." - Tom Lee predicting a significant downturn within the year before a positive year-end recovery.
- At 01:13 - "I think next year the real message at the end of the year will be there's the Fed put back in play. So then you have a White House put and a Fed put which are tailwinds for stocks." - Tom Lee on the key supportive factors he expects to emerge by the end of 2026.
Takeaways
- Brace for a volatile ride in 2026, as the market may experience a significant correction before ultimately ending the year with gains.
- Pay close attention to the transition at the Federal Reserve, as the market's testing of a new Chair is expected to be a major source of turbulence through October.
- Consider diversifying beyond the Magnificent 7, as market leadership is showing signs of broadening into sectors like financials, small caps, and basic materials.
