Tom Lee sees 2026 delivering ‘joy, depression and rally’ in one volatile year

Tom Lee expects 2026 to compress early volatility and fear into a late-year rally, with Fed cuts, ISM above 50, and earnings re-rating lifting energy, financials and small caps.

Tom Lee, head of research at Fundstrat, has outlined a forecast for financial markets in 2026 that anticipates early-year volatility followed by a strong finish, according to statements made during a CNBC interview.

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Lee characterized the expected market pattern as “joy, depression and a rally” compressed into a single year. The analyst drew parallels to 2025, which experienced weakness at the start before rallying to close higher, with April marking the low point for that year.

“The market will test the new Fed. That probably is the reason we have some fear this year,” Lee stated, according to the interview. He added that multiple factors support an optimistic outlook, including the anniversarying of tariffs, anticipated Federal Reserve rate cuts, and potential improvement in the Institute of Supply Management (ISM) index above 50.

Energy stocks represent one of Fundstrat’s top sector picks for the year, Lee said, noting the sector has lagged in recent performance.

Beyond the so-called Magnificent 7 technology stocks, Lee identified financials and small-cap stocks as sectors positioned for potential outperformance. The Magnificent 7 companies are expected to continue delivering strong earnings growth, according to the analyst.

Lee projected that earnings performance will exceed expectations, with other sectors experiencing re-rating while the Magnificent 7 may track earnings growth more closely. This dynamic could result in a lower overall price-to-earnings ratio for the broader market, he said.

The forecast comes as investors assess market positioning amid monetary policy changes and evolving economic indicators.