Fundstrat’s Tom Lee warns that the stock market could face a sharp stress test in 2026, before powerful policy backstops set the stage for a strong rebound.
In a new CNBC interview, the Fundstrat co-founder says markets are coming off an unusually strong run, with the S&P 500 likely finishing this year around 7,000 after three straight years of roughly 20% gains.
But Lee notes that the pace is unlikely to continue uninterrupted.
“We’re three years at 20% gains, so I think there’s a deceleration of what the market can do next year.”
Lee points to a cluster of political and monetary flashpoints that could pressure stocks during much of 2026.
“Next year is a year where we have the Supreme Court potentially overturning tariffs, and then a new Fed, which will be tested. So I think we could have what looks like a bear market in 2026…”
The investor says that historically, markets always test a new Fed, as Chair Jerome Powell’s term ends in May of next year.
“A new [Fed] chairman has to be confirmed. It takes about 90 days from the time that his nomination takes place and the confirmation. And the markets always test a new Fed chair. So I think that the January to October period is when the Fed is being tested, even though we know it’s to be a dovish Fed and a Fed put comes out of that.”
But Lee predicts that the S&P 500 will ignite a strong rebound to 7,700 before the end of the year. He notes that the Fed ended qualitative tightening (QT) this month, which represents quantitative easing or QE. Lee adds that the White House is also stimulating the economy through tax cuts.
According to the investor, the two macro catalysts will power stocks for a “strong exit.”
“I think next year, the real message at the end of the year will be there’s the Fed put back in play. So then you have a White House put and a Fed put, which are tailwinds for stocks.”
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