Wall Street's most prominent bull is turning cautious in the near term. Tom Lee, co-founder and head of research at Fundstrat Global Advisors, laid out a three-act scenario for US stocks in 2026 during a late-May CNBC interview, predicting a near-term rally, a mid-year correction, and eventually a historic surge that he calls the 'biggest gain of our lifetime.'
Act I: Earnings Surprise Drives S&P 500 to 7,700
As of June 4, the S&P 500 stood at 7,584, up nearly 11% year-to-date. Lee attributes the momentum to a strong earnings beat: the market had priced in Q1 EPS of around $70, but actual results came in near $80. According to FactSet, 85% of S&P 500 constituents posted EPS above consensus, beating the five-year average of 78%, with aggregate earnings up 12.9% year-over-year—the sixth consecutive quarter of double-digit growth. The 85% surprise rate is the highest since Q2 2021.
If the trend holds, Lee estimates full-year EPS could be about $40 higher than initial forecasts, theoretically unlocking 800 to 1,000 points of upside for the index. His near-term target: 7,700. That implies a forward P/E of roughly 20-25x on the extra $40 EPS—an optimistic assumption in itself.
Act II: Triple Threat Triggers Correction – $200B+ IPO Drain
But the honeymoon phase may be short-lived. Lee warns that a 'digestion period' could set in and last through October, fueled by three converging pressures. First, the Fed's policy vacuum: new Chair Kevin Warsh was sworn in on May 22 with the narrowest confirmation margin ever, leaving the trajectory unclear. Second, lingering energy supply shocks keep inflation fears alive. Third, and most concretely, a tidal wave of mega-IPOs: SpaceX is set to start trading on June 12 at a valuation above $1.75 trillion, aiming to raise $75 billion; OpenAI plans a September listing at over $1 trillion; and Anthropic filed a confidential S-1 on June 1 for an October IPO valued at roughly $965 billion. Combined, these three vehicles could siphon more than $200 billion from public markets.
Lee calls this phase a potential 'bear-like adjustment,' but clarifies it is a structural digestion rather than a recessionary collapse. The $200 billion in new supply means capital must shift from existing holdings, putting every stock in the index in direct competition for the same liquidity pool.
Act III: The Big Bet on 2027-2028 – Post-Midterm Relief
Lee's most bullish call comes in act three. He expects the digestion pressure to fade after the US midterm elections on November 3, after which the market should resume its uptrend. Historical patterns support this: midterm years typically see volatility peak before Election Day, followed by a 12-month advance—a seasonal rhythm that has held nearly every time over the past 70 years.
Lee's boldest prediction targets 2027 and 2028: 'This may be the biggest gain in a generation of investors'—using the phrase 'in our lifetime,' a degree of conviction rarely heard on Wall Street. That said, Lee's track record shows he often gets the direction right but the timing wrong. Reading 7,700 as a ceiling rather than a floor might be the safer bet.