Why Fundstrat's Tom Lee says a midyear drawdown is likely
Speakers
Tom Lee
— Managing Partner & Head of Research, Fundstrat
Summary
Tom Lee of Fundstrat tells CNBC’s Closing Bell that the early-year market rally is encouraging because breadth is broad, with participation across sectors. He sees macro tailwinds from tariff clarity and a dovish Fed, and expects stronger 2026 S&P earnings quality. His base case is a rally early in the year, a big midyear correction that could feel like a bear market, and then a rally at the end of the year. He also sees a Supreme Court tariff ruling as a net positive for equities if tariffs are capped or lowered.
- Stocks are off to a strong start with broad participation across energy, materials, health care, financials, industrials, small caps, crypto, and the Mag 7.
- Tom Lee sees tariff disruption easing and a dovish Fed as macro tailwinds for equities.
- He expects 2026 S&P 500 earnings quality to improve on higher revenue growth.
- His base case is an early rally, a painful midyear drawdown, and a year-end rally.
- A Supreme Court ruling against tariffs could be net positive for markets, though refunds could cause confusion.
- Valuation at 22 times earnings was discussed, with Barclays saying it is reasonable if EPS growth stays positive.
- Investment firms are buying tariff refund claims at $0.30 on the dollar.
Ideas
Midyear drawdown likely, then year-end rally
If the Supreme Court strikes down tariffs, Tom Lee sees it as a net positive for the market because it puts a ceiling on tariffs—they won't go higher, and there is a chance they go lower. He acknowledges short-term confusion over refunds and possible reimplementation, but expects the overall impact to be positive.
Broad market breadth is encouraging
Tom Lee finds the market’s breadth encouraging because energy, materials, the Mag 7, crypto, health care, financials, industrials, and small caps are all participating. He views a broad, everything-rally as a good sign for investors.
