Tom Lee Forecasts a Year of Volatility and Rally in 2026

Tom Lee, the head of research at Fundstrat, expects the year 2026 to be marked by significant market fluctuations early on, concluding with a robust rally. His predictions, shared during a CNBC interview, highlight factors like potential Federal Reserve interest rate cuts and a rebound in the Institute of Supply Management (ISM) index, which together could boost sectors such as energy, financials, and small-cap stocks.

Key Takeaways:

Tom Lee anticipates 2026 will be a year filled with early volatility followed by a strong rally.
He describes the anticipated market experience as one of "joy, depression, and a rally."
Significant factors influencing this outlook include potential Fed rate cuts, an ISM index rebound, and a reassessment of earnings.
Energy stocks are viewed as top picks, with financial and small-cap stocks expected to outperform.
The “Magnificent 7” technology stocks are likely to maintain strong earnings growth.

Tom Lee outlines 2026 volatility and late-year rally outlook.

Early Volatility Leading to Optimism

Lee envisages a year where early fears and volatility will eventually give way to a late-year rally, mirroring the market patterns observed in 2025. At the start of 2025, there was noticeable weakness before a recovery took place, with April marking a significant low.

“There’s a lot to be optimistic about in 2026,” Lee remarked during the interview, emphasizing that the market is likely to test the new Federal Reserve, which is contributing to this year's uncertainty. He listed various supportive trends, including the end of tariffs and the anticipated cuts from the Federal Reserve, as well as a possible rise in the ISM index above the crucial 50 mark.

Sector Analysis: Energy and Financials Take the Lead

Energy stocks have been underperforming recently, and Lee pinpointed them as one of Fundstrat’s favored sectors for the upcoming year. He noted that aside from the prominent “Magnificent 7” tech stocks, financial and small-cap equities are also well-positioned for notable outperformance.

The strong performance of the Magnificent 7 is expected to continue, as these companies are anticipated to deliver robust earnings growth. Lee predicts that overall earnings will surpass expectations, leading to a re-rating across various sectors. He also mentioned that while the Magnificent 7 may follow close to earnings growth, other sectors could adjust their valuations downwards, potentially resulting in a lower price-to-earnings ratio for the broader market.

Conclusion

As 2026 draws closer, investors are carefully evaluating market conditions in light of changes in monetary policy and shifting economic indicators. Tom Lee’s forecast suggests a complex but ultimately optimistic year ahead, where both challenges and opportunities abound in the landscape of cryptocurrency and beyond.