Tom Lee, chief investment officer at Fundstrat, predicts a 10% rise in equity markets by the end of 2026, despite persistent macroeconomic uncertainties. His outlook hinges on expected Federal Reserve rate cuts and improving corporate earnings.
- 10% projected gain for U.S. equities by December 2026
- Federal Reserve expected to cut rates by 125 basis points through 2026
- S&P 500 historically gains 11% on average following first rate cut
- Corporate earnings forecasted to grow 6% YoY in early 2026
- Technology and consumer discretionary sectors likely to lead gains
- ETFs such as SPY, QQQ, and IWM positioned for outperformance
Tom Lee, a prominent figure in U.S. equity forecasting, anticipates a 10% rally in major U.S. stock indices by December 2026. The projection comes amid widespread concerns over inflation persistence, geopolitical tensions, and elevated bond yields. Lee emphasizes that the market’s forward-looking nature will eventually price in the Federal Reserve’s anticipated pivot from restrictive monetary policy to rate reductions. The forecast assumes the Federal Reserve will begin cutting interest rates in the second half of 2025, with cumulative reductions totaling 125 basis points by year-end 2026. This shift, Lee argues, will reduce discount rates for future cash flows and boost equity valuations, particularly in growth and technology sectors. Historical data from past rate-cut cycles supports the model, where S&P 500 gains averaged 11% in the 12 months following the first rate reduction. Key indicators underpinning the forecast include an expected moderation in inflation to the Fed’s 2% target by mid-2026, sustained corporate earnings growth of 6% year-over-year in the first half of 2026, and a stabilization in credit spreads. These factors collectively signal a favorable environment for risk assets, even if near-term volatility remains elevated. The rally would primarily benefit large-cap equities, with technology and consumer discretionary sectors leading gains. Investors in ETFs like SPY, QQQ, and IWM may see enhanced returns, while fixed-income investors could face pressure on bond yields as capital flows shift toward equities. Market participants are advised to remain cautious but positioned for long-term appreciation.