Fundstrat’s Tom Lee warns of market tests later this summer, sees 15–20% correction

Wall Street permabull Tom Lee is tempering his 2026 outlook with a warning that investors should brace for significant market volatility later this summer, forecasting a potential 15–20% correction before a strong year-end rally sends the S&P 500 to 7,700.

“We’re going to face some tests later this summer,” Lee, Managing Partner and Head of Research at Fundstrat Global Advisors, said in a recent interview. “But these tests will set the stage for the best 18–24 months we’ve ever seen”.

Correction forecast before year-end rally

Lee’s near-term outlook diverges from his long-term bullishness. While he predicts the S&P 500 will reach 7,700 by end of 2026 — up roughly 12% from current levels near 6,827 — he anticipates a 15–20% drawdown in the coming months that will test investor resolve.

“The first half is going to be a ‘joy, depression’ story,” Lee explained, describing the market’s anticipated trajectory. “We’re going to have this painful start that feels like summer 2022, but the pain is almost over”.

Lee drew parallels to the summer 2022 crash, when the S&P 500 dropped 20% amid inflation fears and Fed rate hikes, before rallying more than 13% for the remainder of the year.

Fed policy shift key catalyst

Lee’s year-end rally thesis hinges on the Federal Reserve pivoting to a more dovish stance in 2026, potentially delivering two to three rate cuts as inflation eases.

“The Fed is going to be adding fuel to the market in 2026,” Lee said. “We expect the Fed to be dovish, and that dovishness will be the rocket fuel for equities”.

He noted that the new Fed leadership faces pressure to cut rates amid slowing economic growth and persistent labor shortages, which have kept wage growth elevated even as inflation moderates.

Summer test: What could trigger the pullback?

Lee identified several factors that could precipitate the summer market stress:

· Geopolitical tensions and ongoing trade disputes

· Tariff implementation and uncertainty around trade policy

· Political fragmentation as midterm election approaches

· Profit-taking after the strong first-half rally

· Valuation concerns in AI and technology sectors

“These tests are necessary to cleanse the market and set up for the advance,” Lee said. “When you have a 15–20% correction, that’s when the smart money comes in”.

Ed Yardeni: Cautious optimism on equities

Independent economist Ed Yardeni, President of Yardeni Research, offered a complementary perspective on the market outlook.

“The market is testing the new Fed… and it’s a BUY signal,” Yardeni said in a recent appearance, acknowledging near-term volatility while maintaining a constructive long-term view.

Yardeni cautioned that while the correction Lee predicts could be healthy, investors should remain disciplined. “The best path forward is still equity markets, but you need to be selective,” Yardeni noted, emphasizing that the S&P 500’s earnings growth remains supported by the corporate AI investment boom.

Tech sector still expected to outperform

Despite the correction warning, Lee remains bullish on technology semiconductors and memory chips, which he sees as core beneficiaries of the AI arms race.

“I think semi’s and memory could still outperform in a volatile market,” Lee said, pointing to the continued surge in AI infrastructure spending across hyperscalers.

Fundstrat’s research team has identified that Big Tech’s AI capex is expected to reach $725 billion in 2026, providing sustained demand for chipmakers and memory producers.

Market context: Bulls vs. bears debate

Lee’s warning comes amid growing debate on Wall Street about whether the AI-driven rally is sustainable or heading for a bubble burst. Viral hedge fund manager Michael Burry has issued bubble warnings, while Lee pushes back.

“I know the haters will hate, but this is the early days of the AI revolution,” Lee said, echoing similar bullish sentiment from other analysts. “The market is going to look back at this summer’s correction as a buying opportunity”.

Bitcoin and crypto outlook

Lee also flagged Ethereum as a major winner from the dovish Fed pivot, predicting it could exceed $12,000 by 2026.

“Crypto is another asset class that will benefit from the Fed’s dovish turn,” Lee said.