Wall Street strategist Tom Lee believes 2026 could be a roller-coaster year for markets, marked by sharp swings in sentiment before ending on a high note. In his view, investors should be prepared for early fear and uncertainty that eventually gives way to a powerful rally later in the year.
Speaking in a recent CNBC interview, the Fundstrat head of research described 2026 as a “joy, depression and rally” year — a full emotional cycle packed into twelve months. Lee compared the outlook to 2025, when markets struggled early on before finding a bottom in April and finishing the year with solid gains.
According to Lee, the opening months of 2026 may test investor confidence as markets adjust to a changing Federal Reserve. “The market will test the new Fed,” he said, suggesting that uncertainty around monetary policy could spark short-term volatility and fear. However, he believes these concerns will be temporary.
Several macro factors, Lee noted, could set the stage for a strong rebound. One key driver is the expected shift toward Federal Reserve rate cuts, which could ease financial conditions and support risk assets. He also pointed to the anniversary effects of tariffs, which may reduce year-over-year pressure on the economy as those comparisons fade.
Another important signal Lee is watching is the Institute for Supply Management (ISM) index. A move back above the 50 level would indicate expansion in economic activity, something he sees as a potential tailwind for corporate earnings growth and overall market confidence.
On the sector front, Lee highlighted energy stocks as one of Fundstrat’s top picks for 2026. He noted that the sector has lagged recently, which could leave room for catch-up performance if earnings and demand improve.
Beyond the dominant technology names known as the “Magnificent 7,” Lee sees opportunity in financials and small-cap stocks. While he expects the mega-cap tech giants to continue posting strong earnings growth, he believes their stock prices may start to align more closely with fundamentals rather than racing far ahead of them.
This shift could open the door for other sectors to experience valuation re-ratings. If earnings across the market beat expectations, Lee suggested, the broader market could see a lower overall price-to-earnings ratio even as prices move higher — a healthier setup for long-term gains.
As investors look ahead to 2026, Lee’s outlook paints a picture of short-term discomfort followed by longer-term opportunity. For those able to ride out the early turbulence, the year could ultimately deliver a rewarding finish.
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