While Headlines Screamed Panic, Tom Lee Saw a V-Shaped Recovery

• Tom Lee of Fundstrat Global Advisors accurately predicted a swift market recovery in 2025, driven by stable high-yield bond spreads, historical V-shaped rebound patterns, and resilient corporate earnings despite tariff-related panic.
• He highlighted the pitfalls of market timing, noting that political biases among investors exaggerated the sell-off, while bond market signals and the importance of staying invested for the best trading days supported his bullish outlook.
• Looking to 2026, Lee sees opportunities in undervalued stocks like Tesla (TSLA) and small caps, with manageable 4% bond yields, potential deregulation, and improved trade partnerships fostering earnings growth.

Tom Lee, head of research at Fundstrat Global Advisors, joined CNBC’s ‘Power Lunch’ to discuss the recent market recovery and his outlook for the future, following a turbulent period sparked by tariff announcements on April 2. Despite widespread panic and headlines warning of economic collapse, Lee remained steadfast, advising clients to hold their positions and even increase exposure, predicting that markets would reach new highs in 2025. His confidence has been vindicated, with the stock market staging one of the fastest recoveries in history, nearly erasing yearly losses and approaching positive territory.

Lee attributed his optimistic stance to three key factors. First, the high-yield bond market never signaled the severe economic distress that many economists feared. While high-yield spreads widened to 439 basis points during the turmoil, they remained far below the 700 basis points typically associated with an impending recession, and have since tightened to 360. Second, historical data supported a swift recovery, as 17 out of 18 waterfall declines since 1950 were followed by V-shaped rebounds, with 2022 being the sole exception due to the Jackson Hole event. Third, Lee emphasized the resilience of businesses, which have weathered a pandemic shutdown, a bullwhip effect during recovery, and the fastest rate hikes in history. These companies delivered strong first-quarter earnings and guidance, defying expectations of an economic Armageddon.

Addressing the moderator’s point about the dangers of market timing, Lee highlighted the political undertones of the sell-off, which amplified its impact. He noted a divergence in investor sentiment, with over 60% of equity professionals leaning Democratic and interpreting White House actions pessimistically, while 60% of bond managers, who are predominantly Republican, provided a calmer signal through the bond market. Lee also underscored the importance of staying invested, citing data showing that excluding the ten best trading days in 2023 or 2024 would have reduced S&P 500 returns to just 3% annually, compared to the 20% gains achieved by those who remained in the market. Investors who sold at the market’s low of 4,835 missed a 1,000-point rally, equivalent to a 20% gain in 2025.

On the topic of bond yields, Lee expressed confidence that the current 10-year yield of 4% is manageable for the government, economy, and businesses, allowing companies to earn a return on capital. Looking ahead to 2026, he sees reasons for optimism, including potential deregulation, resolved tariff issues, possible tax cuts, and improved trade partnerships, all of which could drive earnings growth for U.S. companies. Despite the market’s recovery, Lee believes opportunities remain, particularly in stocks that were heavily sold off, such as Tesla (TSLA), the Mag 7, and small caps. With the market flat year-to-date through May, he encourages investors not to feel they’ve missed the boat, as many undervalued names still present compelling prospects for long-term gains.

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