Tom Lee: Bear Market Coming in 2026 – Use It As Buying Opportunity

0:00I think the most important advice I can give people is that trying to time the market makes you an enemy of your future performance. because a lot of investors always only want to buy at the bottom and they want to sell at the top. But when we look at the stock market and actually in crypto too, the only people who really make money are those who are investing for the long term. So as much as I'm warning about 2026 and the possibility of a lot of turbulence, they should view the pullback as a chance to buy, not the pullback as a chance to sell and to avoid stocks. We still like the Mag7 because we're confident of their earnings growth.

0:50And so as long as they don't derate, they should actually perform better than the market. But this year, our top sector pick is energy and basic materials. I think it means gold should be sitting in a portfolio. I've seen folks like Ray Dalio recommend up to 10%. He said 15 % on this podcast. Okay, so let's say it's 15%. Most people are at zero for gold. So that means gold is still under-owned today. Crypto still has a, I think, future adoption curve that's higher than gold because more people own gold than own crypto. But the path to getting that adoption rate higher is going to be very jagged.

1:37And I think 2026 will be a really important test because if Bitcoin makes a new all-time high, we know that that deleveraging event is behind us. And your price target for Bitcoin this year is$250 ,000. Yeah, so we think Bitcoin will make a new high this year.

1:55Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by BNY Investments, LSEG, and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. Fans of the podcast will know our guest today very well.

2:35Tom Lee, who returns for his second appearance since joining us in August for what was a very well-received episode. He is, of course, the Fundstrat Global Adviders co-founder and head of research. He's also chair of Bitmine Immersion, an Ethereum treasury company, and oversees the Granny Shots ETF, which when we spoke last August was around$2 billion AUM, is now$4 billion AUM. Extraordinary success, which we'll definitely get to in a moment. Tom, welcome back to the Master Investor Podcast. What a treat to have you here in person in London. Yeah, it's great to see you, Wolf. Happy 2026. And of course, It's cool to be in London.

3:11Yeah, it's really great to have you here. And I do really recommend anyone goes back to the episode from August. In particular, we revisited Tom's successful calls of the last 10 to 15 years. And broadly, not to spoil that episode, how you've managed to maintain a bullish outlook for the most part correctly throughout that period of time. So do go back to that episode for a broad introduction for how Tom does his thinking. And as we start 2026, Tom, I've seen that you've predicted quite precisely a rally to start the year, then a pullback, quite a big pullback, I think, with a rally to follow towards the end of the year.

3:50Is that a fair framing of your outlook for 2026? Yes, that's right. I think when we look back at the end of this year, I think 2026 will look like a continuation of the bull market that started in 2022, and really a period when economic resilience is much more visible. But at the same time, there's two, I think, substantial transitions that the market has to grapple with, maybe three. One is, of course, a new Fed, and the market always tests a new Fed, and that process of identifying and then confirmation plus the market test can create a correction. And I think that in 2026, our view is that the White House is going to be more deliberate in picking winners and losers.

4:37In 2025, that caused a lot of disruption for technology, IT consulting, and for healthcare. And this year, there's a lot more industries and sectors and even countries in the bullseye. And I think that that creates uncertainty. You can tell by a gold rally. And so I think those two factors can cause a drawdown in 2026. Those two factors, you said maybe a third. Yeah. So the third is that the market is still trying to understand how much is priced into AI. And so our view is still a strong narrative. But as you know, there's questions about the longevity, how much energy we really need, data center capacity.

5:20And so until the market is comfortable that there's other stronger narratives, which I think there's plenty, like the ISM is turning up. I think housing could recover as rates are cut, but that transition again would cause uncertainty. So I'm guessing that the three collectively could cause a drawdown that feels like a bear market. So implicit in that is what, like a 20 % peak to trough pullback or more or less? Yeah, it could be 10. I mean, if it's 10, by the way, it's going to feel like a bear market, but it could be 15, it could be 20. But something that maybe brings us to a round trip from the start of the year because we've started off strong.

5:59Maybe we'll be down year to date at some point, but then I think we really finish the year strong. So when we spoke in August, you said that we were at the start or close to the start of a 10-year bull market. Is that still your outlook? I guess another way of saying that is once we've had that pullback, you'll be banging the table and saying this is a fantastic buying opportunity. That's right. Every pullback has been a great opportunity. Last year, the tariff-related drawdown was, on April 7th, turned out to be one of the best entry points in the last five years for anyone buying stocks. There were so many stocks that made new all-time highs, but really explosive rallies.

6:39So I think this year, if what we think happens, it's going to be a great buying opportunity. When you mentioned in August that you thought it was a new 10-year bull market, you said The reasons were a surge in prime age workforce and kind of generation that's inheriting a lot of wealth and the U.S. being at the center of a lot of innovation, particularly AI and blockchain. Are you still as confident in all three of those long term factors? Yeah. In fact, I think four of four still look quite visible. You know, the U.S. does have a favorable demographic tailwind that is in contrast to other countries where the prime age workforce has gone into deficit.

7:19In terms of inherited wealth, I think there's a lot more conversations about it, that Gen Z and millennials and Gen Alpha, they are set to all inherit substantial sums of money over their lifetime. And it's strange because it does create disparity in wealth. There are going to be some very wealthy Gen Z, Gen Alpha, and millennials, while others are going to be, of course, living their life and accumulating their own personal wealth. And then with regard to AI, I would say that evidence that we could be moving towards super intelligence is accelerating. And I think there's a lot more progress being made on robots and integration with robots.

8:05So those are all things that are going to favor the U.S. And then on blockchain, it's not just BlackRock and Robinhood anymore. Jamie Dimon has publicly stated that he thinks blockchain does fix a lot of problems for financial services. So I think the banking industry is starting to embrace the efficiency of blockchain. So clearly the long-term bull market thesis you're still a big believer in after a pullback. How do we sort of try and get as good a feeling as ever about when that initial pullback comes? I was listening to one of your recent appearances on CNBC and you pointed out that markets peak on good news somewhat counterintuitively.

8:46Have we got that good news at the moment that would point to a short-term peak? uh it's hard to say i'm and this is somewhat anecdotal but our institutional clients aren't that bullishly positioned at the moment and until we get to the point where both the public and institutions have positioned a way that good news doesn't make the market go up i think stocks still of upside. That's why the fact that stocks were good in the first week of January is a good omen, and it looks like we're going to finish the month positive. That suggests strength in the early part of the year. Margin debt is something we can watch, and we've been tracking it.

9:32NYSE margin debt is at an all-time high, but it's only risen 39 % year-over-year. Usually for a local top for markets, you want to see that rise 60 % year over year. So there's a chance for essentially leverage to accelerate. And then that marks a local top.

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10:26Let's touch on some of the kind of macro factors then. I guess let's start with trade because I know one of the things you were sort of saying last year was the trade war didn't turn out to be as bad as it could have been. Over the weekend, more threats of tariffs linked to Greenland this time on the UK and the EU. Looks like the UK is going to hold. The EU might retaliate. Is that a worry for you in the short term? Yes and no. I think that last year, investors did a fire-ready aim. Whenever they saw the tariff conversations escalate and become uncertain, the market really reacted poorly and fell sharply.

11:09I think that this year markets are going to be a little more measured. So let's say it's half the amplitude of reaction. But then there is still the uncertainty of how the Supreme Court will rule around the tariffs. And maybe if that rules against Trump, then it's going to look like the leverage of the U.S. has dropped. And so the White House might take more extreme measures, that could cause greater uncertainty. But over the weekend, I've been reading the news. I mean, there's some folks suggesting the Supreme Court might actually rule in Trump's favor. So we don't, I really don't know. In terms of the other sort of big macro question about the Fed, ironically, when we spoke in August, it was in and around attempts to indict Lisa Cook, obviously more high profile attempted indictment this time around.

12:03Generally, your view then was Fed cutting is a good thing for markets, but questioning Fed interference is a bad thing for markets. But I don't think you took the idea of interference that seriously. How do you sum it up today, that outlook? I think it's still the same situation in the sense that there are implicit threats being made against the Fed, including this DOJ inquiry. But I think there are still voices in the White House that are kind of saying let's not undermine the Fed completely because markets know and market history knows that the Fed is still the most important entity in the world.

12:51And to undermine the credibility and the independence would unleash a lot of uncertainty. Um, we also know Fed Chair Powell's term is up this year. So time, there's a bit of like, let the clock run because we know that there'll be a new Fed chair. And I think once we have that in place, I think the White House can be satisfied. And as you know, whoever, who the Fed next Fed chair can be, I mean, the odds keep shifting now. It looks like, um, Hassett has dropped as the probable and Warsh and even Rick Reeder actually are ascending. So. And I guess everyone expects slightly more cuts than maybe the data would purely suggest once that change happens and or a few more cuts this year.

13:38Is that a good thing ultimately for equities? Yeah, I think it is good for equities in the sense that inflation has been the market's fixation since 2022. Part of it, of course, is because the Fed has been fighting an inflation war, and the Fed wants to maintain credibility by being tight. But when I look at the economic data, and I'm not an economist, I think the underlying inflation is actually much lower than the printed. I mean, a simple thing to point to is something like truflation, which is showing 1.8. If you look at median inflation, it's at 1.8. And the thing that's keeping inflation high is housing costs.

14:24But housing prices are falling. So housing, the way that housing is measured in CPI is with a lag. So to me, I think there is cover for the Fed to cut. And if housing, as you know, affordability is a problem, we need to do something about mortgage rates. And that is helped by cutting. And even things like consumer installment debt, those can come down with rate cuts. So I think burdens on a lot of Americans can actually ease with Fed cuts. So let's talk about how people should be positioned sort of under the surface. have the sort of mag 7 or mag 10 that the biggest stocks overrun and they not the right picks for 2026 uh we still like the mag 7 because we're confident of their earnings growth and so they as long as they don't derate they should they should actually perform better than the market But this year, our top sector pick is energy and basic materials.

15:31So in early December, we made that our favorite sector ideas. Part of it is a mean reversion trade. Energy and basic materials have underperformed so badly over the last five years that if you look at their performance in the last 75 years, it's usually marked a turning point, the level of underperformance. And then I think some of the geopolitical things that are taking place would favor both groups. But I think another thing this year is the ISM is likely to break back above 50. And along with Fed cuts, that means industrials, financials, and small caps. So I like MAG7, but I think cyclicals could be the more interesting trade this year.

16:13So just let's do energy first, because I think I'm writing saying you're also not constructive on the oil price in the short term, but you're bullish on the energy stocks. That's right. I've learned oil prices and energy stocks don't correlate. Part of it is that energy stocks price the future levels of oil prices. And I think that we may see weak oil prices or volatility in the near term. but everything from data centers and this shift away from alternatives is going to be putting upside into the future prices of oil and that's why energy stocks can outperform um basic materials obviously for those exposed to metals have had an unbelievable run in their underlying commodity um maybe we'll come to that when we talk about crypto in a moment um what if that corrects a bit Will those stocks do less well?

17:10Is your call on them requiring gold and silver, et cetera, copper to hold up? Yes. I mean, if gold and silver and copper have negative returns this year, then basic materials is not going to work as a trade. But part of our belief is that gold has made a big move, but it's going to be silver and copper that have good years. And as you know, copper is an industrial metal, I think, linked to the ISM. So if copper has upside, I think it leads the basic materials, stocks higher. Financials, you were very bullish on when we spoke in August. So great call on that. They've obviously had a great run. Kind of can't believe the charts of some of them when I look at them compared to when I used to cover them very closely.

17:55Do you still like them at these levels? They're not cheap, are they, anymore, on price to book? Yeah, they're not cheap, but they're, I think, in the midst of being reviewed in terms of the durability of their business models in a favorable way. You know, I think that banks have invested so much in tech and into AI that they are really big beneficiaries of that super intelligence coming and the bank's biggest expense is compensation. So I think banks can reduce their reliance on employees in the future, which means their margins go up and then the variability of their earnings drops. I think they're going to get re-rated more like technology stocks.

18:37And when I started covering – when I started in research in the 90s, banks used to always just be one times price to book or ten times earnings. And I think that they should get a market premium multiple.

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19:17I want to talk more about the tech stocks and AI stocks in a little bit more detail. And I heard you say something on the Prof G podcast that surprised me because you're still constructive, as you've said. You are very constructive correctly and early for most of the last 15 years. But you said only 10 % of the AI stocks will turn out to be a good investment over the next decade. But you still like the sector? Yes. I think that that's pretty true of any exponential growth sector. For instance, when we look back at the internet, if you looked at a basket of stocks, let's say in 2000, so 25 years ago, I think only 2 % of all the universe's stocks actually survived.

20:02But the return generated by that 2%, and then let's say you lost money, the other 98%, you still outperformed meaningfully the S &P 500. So I think in the AI sector, a basket of the entire universe of stocks, it may be more than 90 % turn out to be poor investments, but the winning investments more than make up for it. And I guess the difference perhaps today is that not that many of them are listed. I don't know if that increases the jeopardy or reduces the jeopardy for people playing, the average investor is not going to get exposure to all of them. Yeah, it is a good question because today companies IPO-ing are more mature in their later stage.

20:54But it does seem like that's changing. I think for the first time we're seeing companies now more interested in going public, not all through IPOs, some through SPACs. I think that's coupled with the fact that the alternative world, which is venture, private equity, private credit, the investors in those, LPs, limited partners, they haven't really received distribution. So I think that there is an allocation away from alternatives into public markets and that it's kind of now pushing more things to go into public markets. But you're right. As much as we say that, in the last 12 months, I've seen many publicly traded stocks have big moves.

21:41So I think that there's still a lot of opportunities. And in terms of the sort of hyperscalers, the sort of mega cap names, it's really interesting when you think of the multiples that they've got, which for the most part, I think, have been justified because of growth rates. And again, a conversation you had on another podcast, I was really drawn to, which is the idea that these companies evolve to a sort of staples company, which can have a premium multiple for a different reason. And I guess that got me, I mean, basically, is that the set, Warren Buffett kind of sniffed that out before the rest of us with Apple.

22:19Is that kind of what we're getting at with some of those mega cap names and that even if NVIDIA's growth rate slows that actually it might maintain its its multiple from here yeah that's right i think that some of the listeners should think back to apple which um apple analysts that cover the stock from its ipo um in the 80s insisted apple was a hardware company and they couldn't get over the fact for many years apple shouldn't trade more than 10 times earnings and yet they had a services business that was growing. They, of course, had created a whole ecosystem and retention model that really showed Apple was not just a hardware company.

22:59But I remembered even in the 2015, 2016, 2017 period, I'd meet with institutions and say, Apple's a hardware company. And now, of course, Apple's re-rated completely. I think people look at NVIDIA as a cyclical hardware company. And that's why they're giving it grudgingly a 26 multiple. Whereas Nvidia, as you know, essentially is a company that has a high visibility on future earnings and yet trades at half the multiple of Costco. I think there's a lot of room to re-rate those stocks higher. If the sort of macro outlook is worse than expected, well, either way, as and when we have this market correction that you foresee, let's assume it's 20 % for argument's sake for the S &P 500.

23:47Will those stocks act like a staples company and fall less than the market? Or are they still in the growth company high beta stage such that when we have this correction this year, the invidies of this world will fall more than the S &P 500? Yeah, it's a good question because what will lead in the correction are crowded trades. because that's when people have to de-risk. So it makes sense that, oh, well, the MAG-7 are the large holdings. Well, people de-risk. But as you know, when people get nervous, maybe they go into the MAG-7. And so to me, it's possible that the non-US stocks could be the ones where you see correction because that's where there's a lot of money that's been made.

24:32I mean, non-US stocks did far better last year than US. And so if there's trade escalations and uncertain about the global economic outlook, maybe that's where the correction could be greater. And so you mean across the piece or do you mean specifically tech like ASMLs and TSMCs of this world? Oh, I think more broadly. So it could be MSCI ACWI. Yeah. Interesting.

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25:24let's talk about some of the tom lee specific uh success stories recently because granny shots as i mentioned in the intro um and and this is your etf or suite of etfs now um that that you explain the rationale for in august for us when we last spoke was about two two to two and a half billion You now have$4.5 billion under management for these ETFs. Yeah, in total,$4.7 billion across the three. And the main one is four and a bit? Yeah, that's GRNY. G-R-N-Y is the largest. GRNY J, which is small, made cap, launched in November last year, and that's about$355 million now of assets. And then the income-oriented GRNY, which is GRNY, but generates income.

26:14It paid its first dividend in December. That's usually when asset gathering starts to rise because now there's a posted yield. The targeted yield is around, or I think the posted yield is 10. That's around 55 million. And in terms of the year ahead, is now a good time to buy small caps or income over traditional? now I'm not one that likes to time the market so for instance in in January of last year Mark Newton kind of warned that there could be a drawdown it turned out to 20 was way bigger than we expected but we still wanted people to stay fully invested and and people made their money back by July.

27:04I think that small mid-caps have underperformed for so long that even if there is a drawdown, it's not going to interrupt the fact that there could be a five or six-year cycle of small cap outperformance. So I'd still want to own that. Granny isn't going to go up if the market goes down. So I think anyone buying these ETFs should be aware of that, but they are buying the strongest companies linked to the most important theme. So to me, they should hold up better on a drawdown and of course be stronger on a recovery. Let's touch on gold and then crypto. Why did gold perform so well last year, do you think?