Tom Lee: Energy and basic materials are the top sector picks this year
Speakers
Tom Lee
— Managing Partner & Head of Research, Fundstrat
Summary
Tom Lee joins Closing Bell to discuss a turbulent earnings week and his 2026 market views. He names energy and basic materials as top sector picks on mean reversion, remains positive on Mag-7/megacaps, and expects small caps and the Russell 2000 to continue a multiyear turn as the Fed turns dovish. He also sees equal-weight S&P benefiting from a dovish Fed while warning of a possible midyear S&P drawdown from a new Fed and policy/tariff uncertainty.
- Tom Lee says energy and basic materials are his top 2026 sector picks due to mean reversion.
- He still likes Mag-7 and megacaps for earnings visibility.
- He expects small caps and Russell 2000 to continue multiyear outperformance.
- He says a dovish Fed supports equal-weight S&P.
- He warns of a possible midyear S&P drawdown from a new Fed and tariff policy uncertainty.
- He comments that Intel's post-earnings drop was not surprising.
Ideas
Still likes Mag-7 on earnings visibility
Lee still likes the Mag-7 and megacaps because they are great earnings stories with a lot of visibility, though he flags next week as critical because most of the Mag-7 reports then.
Energy and materials mean-reversion top picks
Lee says energy and basic materials are his top sector picks for 2026 because they have underperformed over the past five years by an amount that, over the past 50 years, has historically marked turning points higher. Much bad news is already baked in, so even merely okay fundamental years could produce strong stock performance as mean reversion takes hold.
Small caps set for multiyear outperformance
Lee expects small caps and the Russell to continue a multiyear turn, potentially up to a 12-year period of relative outperformance. He notes relative price-to-sales and price-to-book for small caps last year matched the 2001 level that launched 12 years of outperformance, and a dovish Fed could help small caps catch up to EM, which had already done well while small caps lagged.
Dovish Fed favors equal-weight S&P
Lee agrees the equal-weight S&P is benefiting from a dovish Fed that is no longer fighting inflation and has ended QT, which he views as effectively a version of QE starting, even without rate cuts, because the Fed wants the economy to do well.
Midyear S&P drawdown risk from transitions
Lee thinks 2026 has the same contours as last year: a good earnings story, but two transitions—a new Fed that the market will test starting with confirmation around March, and policy and tariff uncertainty—could cause a drawdown. He notes tariff uncertainty alone was enough to drive a 20% S&P 500 decline last year.
