Tom Lee, a well-known Wall Street strategist and co-founder of Fundstrat, recently stated in an interview that the U.S. stock market is about to enter a three-phase trajectory, with the second phase potentially including a pullback or even a bear market. Although Lee is renowned for his long-term bullish outlook and has accurately predicted the bull market multiple times over the past few years, he now warns that the market will face a bumpy patch in the short term.
As of recent, the benchmark S&P 500 index has risen nearly 11% so far this year. This performance is quite strong, especially considering that the market has overcome early-year concerns about artificial intelligence and the rise in oil and gas prices stemming from the situation in Iran, the latter of which is intensifying inflationary pressures.
However, Lee points out that the market has been supported by exceptionally strong first-quarter earnings. He explains that most market forecasters had expected combined first-quarter earnings per share for S&P 500 components to be around $70, but the actual figure came in at approximately $80, significantly exceeding expectations. Lee notes that if the market maintains this growth trajectory, it would translate to an additional $40 in annualized earnings per share, which could push the S&P 500 up by 800 to 1,000 points.
Nevertheless, Lee’s baseline expectation is that the market will go through three phases. This judgment is based on his and Fundstrat’s earlier belief that this year would be a “challenging year.”
Phase One: The current ongoing phase, which is generally bullish. As of June 3, the S&P 500 stood slightly above 7,560 points. Lee believes this rally could continue for some time, potentially reaching near 7,700 points.
Phase Two: A difficult period arriving in the short term. Lee states, “Next, we will digest a large amount of information, lasting until October. This includes the appointment of the new Federal Reserve Chair, an energy shock — especially shortages of petroleum products and lubricants — and the IPOs of SpaceX, OpenAI, and Anthropic. When lock-up periods expire, the market will face a significant amount of additional supply.” By “lock-up period expiration,” he refers to the lifting of restrictions that prevent company insiders and employees from selling shares on the open market. Lee adds, “I think this could put pressure on stocks, and it might feel like a bear market.”
Phase Three: The post-midterm election period. Lee expects this more difficult period to end after the midterm elections, followed by a strong stock market rebound, with 2027 bringing “the best market conditions of our lifetimes.”
Lee is not the only analyst who believes the market is nearing levels that could trigger a pullback or bear market. The biggest current risks include the ongoing situation in Iran and persistently high inflation. If bond yields continue to rise, the market may react poorly, and the Federal Reserve could even be forced to raise interest rates.
If you are a long-term investor with a 5- to 10-year investment horizon, aside from staying informed about developments, there is little need for major adjustments. However, if you are more focused on preserving capital or locking in current profit levels, now may be the time to take profits, increase cash reserves, or add to more defensive stocks and sectors that tend to hold up better during market declines. The crucial first step is to clarify your own investment goals and time horizon, then review your portfolio and formulate a plan to prepare for a potential short-term pullback.
