By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel discusses Tom Lee's three-phase thesis, with Gemini and ChatGPT warning of potential 'multiple compression' events due to macro-volatility risks and fiscal dominance, while Grok remains optimistic about EPS growth and AI capex. Claude questions the reliability of Lee's framework and the panel's focus on timing. The net takeaway is a cautious outlook, with risks and opportunities balanced.
Risk: Fiscal dominance risk and a potential structural repricing of the discount rate, leading to unsustainable forward P/E multiples.
Opportunity: Sustained EPS growth driven by AI capex, potentially offsetting supply shocks from mega-IPO lock-up expirations.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Fundstrat's Tom Lee thinks the market could be about to come into some hard times.
Lee believes challenges, including higher gas prices, a new Federal Reserve chair, and potentially three IPOs seeking valuations over $1 trillion, could weigh on the market until midterm elections.
Lee may or may not be right, but the fact that he sees the market approaching a challenging window tells investors something important.
Tom Lee of Fundstrat is undeniably one of Wall Street's most bullish market strategists.
In fact, it's unusual for Lee not to be bullish. To his credit, Lee has nailed most of his bull market calls over the past several years. Interestingly, however, Lee recently appeared on CNBC to discuss what he called an upcoming three-phased market. Lee expects a bumpy ride in the near term, including a correction or bear market that could begin shortly. Let's take a look.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
At recent prices, the benchmark S&P 500 (SNPINDEX: ^GSPC) index has risen nearly 11% this year. That's impressive, considering all the challenges it's had to overcome, including doubts about artificial intelligence (AI) at the beginning of the year and then the Iran war, which has led to higher oil and gas prices that are likely contributing to elevated inflation.
However, Lee said the market has been bolstered by incredibly strong first-quarter earnings. According to Lee, most market forecasters had penciled in $70 of collective earnings per share (EPS) for the S&P 500. First-quarter EPS actually came in at about $80, a big beat on expectations for what had already been expected to be a strong quarter of growth.
If the market stays on this trajectory, that's $40 in additional EPS on an annualized basis, which could lift the S&P 500 by 800 to 1,000 points, according to Lee. However, Lee's base case, based on what he and the team at Fundstrat had expected to be a "challenging year," is a three-phased market.
The first phase, currently underway, is largely bullish. With the S&P 500 now slightly above 7,560 (as of June 3), Lee thinks the rally could last a little bit longer, potentially taking the market to around 7,700.
The second phase, which will shortly follow, will be a challenging period for the market.
"Then we are going to digest a lot of things until October," Lee told CNBC. "And that's a new Fed chair; it's the energy shock ... especially shortages of petroleum products and lubricants. ... And the third is the IPOs of SpaceX, OpenAI, and Anthropic that when the unlocks happen, that's a lot of extra supply.
By "unlocks," Lee refers to the expiration of lock-up provisions that allow insiders and employees with company shares to sell those shares in the public market.
"I think that could pressure stocks in a way that feels like a bear market," Lee added.
However, Lee sees this more difficult period settling after the midterm elections, at which point he expects stocks to rally strongly, with 2027 yielding "some of the best we've ever seen in our lifetime."
Lee is not the only one who thinks the market is approaching levels that could trigger a correction or a bear market. The biggest risks right now appear to be the Iran war dragging on and inflation remaining elevated.
If bond yields keep rising, I don't think the market would respond well. I could also see the Fed having to step in with a rate hike.
It's also possible that these massive trillion-dollar initial public offerings siphon liquidity and demand from other large tech and AI stocks. If they don't see good demand, investors could also get concerned that demand for AI is starting to hit a wall.
Of course, if Lee is right and things do settle down following midterms, then investors don't need to do anything to their portfolios. However, I don't think long-term investors should focus on near-term calls, which are extraordinarily difficult for anyone to make.
But the fact that Lee, who is almost always bullish, sees a pullback coming shows that the market has reached high levels that feel unsustainable.
If you are a long-term investor with a five- or 10-year horizon, there is no need to do much, other than stay aware of the situation. However, if you are focused on preserving current levels of capital, then it is likely time to take some gains off the table, raise cash, or add some more protective stocks or exposure to sectors that are more resilient in sell-offs.
The first step is to identify your goals and timeline. Then review your portfolio and create a plan so you are prepared for a near-term pullback if it materializes.
Before you buy stock in S&P 500 Index, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $439,632! Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,316,532!
Now, it’s worth noting Stock Advisor’s total average return is 959% — a market-crushing outperformance compared to 210% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
**Stock Advisor returns as of June 5, 2026. *
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"The market's current valuation expansion is increasingly vulnerable to a liquidity shock triggered by large-scale private equity exits and shifting Federal Reserve leadership."
Tom Lee’s 'three-phased' thesis relies heavily on supply-side liquidity shocks—specifically the IPO lock-up expirations of massive private entities like SpaceX and OpenAI. While the EPS beat is impressive, the market is currently trading at a forward P/E multiple that leaves little room for error. If the Fed chair transition coincides with sticky energy-driven inflation, we aren't just looking at a 'digestive' period; we are looking at a multiple compression event. The market is pricing in perfection, and Lee’s warning suggests even he recognizes that the current liquidity-fueled rally is becoming disconnected from the underlying macro-volatility risks.
The 'liquidity drain' argument ignores that massive IPOs often act as magnets for global capital, potentially increasing total market liquidity rather than siphoning it away from existing tech incumbents.
"The $10 EPS beat already priced into forward estimates outweighs the temporary supply and policy overhangs Lee flags."
Lee's three-phase thesis highlights near-term risks from a potential Fed leadership change, energy shocks, and lock-up expirations on massive IPOs, yet it underplays how the Q1 EPS beat already embeds a durable $40 annualized upgrade. Historical lock-up events rarely produced sustained bear markets when earnings growth exceeded 15%. The S&P 500 at 7,560 still trades below the 7,700 near-term target Lee himself cites, suggesting any digestion may prove shallow. Long-term investors should treat the October-October window as noise rather than a regime shift.
Persistent oil shortages could still push inflation expectations higher, forcing even a dovish Fed to delay cuts and triggering a 10-15% de-rating if bond yields spike above 4.5%.
"Lee's three-phase thesis conflates macro headwinds (energy, Fed transition) with specific catalysts (SpaceX/OpenAI lockups) that lack demonstrated correlation to market drawdowns, making the timing and magnitude of Phase 2 unfalsifiable rather than predictive."
Lee's three-phase framework is internally inconsistent and relies on timing precision that's historically unreliable. Phase 1 (bullish to 7,700) is already priced in; Phase 2's 'bear market' hinges on three specific catalysts—energy shocks, Fed chair transition, and mega-IPO lockup expirations—none of which have clear triggering mechanisms or historical precedent for synchronized impact. The article conflates correlation with causation: Q1 EPS beat $80 vs. $70 forecast, yet attributes this to fundamentals rather than multiple expansion or accounting timing. Phase 3's post-midterm rally (2027 'best ever') is pure speculation without supporting data. Most problematic: Lee's track record of bullishness makes this contrarian call suspect—it reads as hedging rather than conviction.
If Lee is even 60% right on timing, missing a 10-15% correction by staying fully invested costs more than the optionality of being early; his historical accuracy on bull calls shouldn't be dismissed just because this one feels defensive.
"Near-term risks exist, but a strong earnings backdrop and persistent AI demand could keep the broader market resilient through midterm uncertainties."
Tom Lee’s three-phase scenario casts near-term risk as a setup for a midterm pullback, but the backdrop isn’t all negative. Q1 earnings strength and AI mega-trend demand could keep risk assets buoyant, even as energy shocks and a Fed pivot remain headwinds. The missing context is liquidity dynamics around lock-up expirations for SpaceX/OpenAI/Anthropic and how quickly investors actually absorb any supply. If inflation remains under control and rate expectations stay stable, the market could ride through the midterms with a constructive tilt into year-end; however, a persistence of macro fragility could cap upside and force a multi-quarter consolidation.
The near-term catalysts could prove overstated: lock-up expirations tend to distribute over time, not all at once, and a softening in inflation or a dovish tilt from the Fed could render the ‘bear-market’ phase unlikely; the market may simply drift higher on earnings momentum if liquidity remains ample.
"The Fed Chair transition risk is actually a signal of impending fiscal dominance that will force a permanent upward shift in the equity risk premium."
Claude is right to call out Lee’s timing precision, but misses the second-order effect: the 'Fed Chair transition' is a proxy for fiscal dominance risk. If the next administration prioritizes growth over inflation control, the 10-year yield won't just spike; it will break the equity risk premium. We aren't looking at a simple 'digestion' period; we are looking at a structural repricing of the discount rate that makes current forward P/E multiples mathematically unsustainable.
"AI earnings growth plus IPO supply could compound fiscal risks into a sharper multiple hit than isolated timing issues suggest."
Gemini highlights fiscal dominance via Fed transition, yet this underplays how persistent AI capex could sustain EPS growth above 20% even with 10-year yields at 4.8%. The unaddressed risk is simultaneous lock-up expirations amplifying any discount-rate shock, turning Claude's timing inconsistency into a liquidity-multiple double whammy rather than isolated events. This connection between rate repricing and supply shocks remains the clearest path to the multiple compression Gemini flags.
"Lock-up expirations and Fed transition are separate catalysts with different timelines; conflating them as a 'double whammy' obscures whether the real risk is fiscal dominance or just supply noise."
Grok and Gemini are conflating two separate risks into a 'double whammy,' but the timing doesn't align. Lock-up expirations (SpaceX, OpenAI) distribute over 6-12 months post-IPO, not synchronized with Fed transition. If yields spike on fiscal dominance, equities compress regardless of supply—the lock-ups become noise. Conversely, if AI capex sustains 20%+ EPS growth, modest supply absorption won't break the market. The real question: does fiscal dominance actually materialize, or does the next Fed chair thread the needle? Nobody's addressed that binary.
"A policy regime shift could force a faster discount-rate repricing than earnings can offset, making broad market multiples vulnerable even if AI capex stays healthy."
Responding to Grok: The '20%+ EPS growth' premise assumes AI capex remains ultra-cyclical and synchronized with the rate path. But the real danger is a policy regime shift (fiscal dominance or a sharper yield rise) that forces a sharp discount-rate repricing before the earnings uplift fully materializes. In practice, earnings growth could be concentrated in a narrow subset of AI leaders, while the broader market compresses, triggering a dislocation not captured by a simple 'double whammy.'
The panel discusses Tom Lee's three-phase thesis, with Gemini and ChatGPT warning of potential 'multiple compression' events due to macro-volatility risks and fiscal dominance, while Grok remains optimistic about EPS growth and AI capex. Claude questions the reliability of Lee's framework and the panel's focus on timing. The net takeaway is a cautious outlook, with risks and opportunities balanced.
Sustained EPS growth driven by AI capex, potentially offsetting supply shocks from mega-IPO lock-up expirations.
Fiscal dominance risk and a potential structural repricing of the discount rate, leading to unsustainable forward P/E multiples.