Tom Lee: Energy and basic materials are the top sector picks this year

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Tom Lee: Energy and basic materials are the top sector picks this year

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Small cap turns tend to be multi-year (up to 12 years)... I think small caps benefit from Fed turning dovish... Current Russell valuation similar to 2001 launch point that led to 12 years of outperformance; expects multi-year outperformance cycle.

1/5/2026 2:03:32 PM	medium term up	20 days later	+2.97%	+2.97%

Asks if recent market turbulence portends something forward.

Scott
Tom Lee

Attributes volatility to earnings season; high-profile declines like Intel are unsurprising given prior strong performance.

Intel was $17 a year ago, so stocks that have done really well can get punished on earnings.
Notes next week's mega-cap earnings are critical, which Lee still loves but not as much.

Scott
Tom Lee

Still likes MAG-7 and mega-caps for earnings visibility, but top sector picks for the year are energy and basic materials.

Next week is critical because most of MAG-7 are reporting.
Asks why Lee leaned toward energy and materials at year begin.

Scott
Tom Lee

Bet on mean reversion in 2026; energy/materials underperformance over last 5 years was at levels marking historical turning points higher.

Bad news was baked in, so they could have okay fundamental years but stocks could do really well.
Suggests Lee was early on small caps/Russell call but notes Russell is now outperforming.

Reminds that Lee predicted 50% Russell gain last year; now Russell up 5% in one month.

Scott
Tom Lee

Small cap turns tend to be multi-year (up to 12 years); current relative valuation similar to 2001 launch point.

Small caps benefit from Fed turning dovish, possible M&A wave, ISM back above 50, and catching up to EM which did well last year.
Notes Fed meeting next week with no action expected, and Rick Rieder leading prediction markets for next Fed chair.

Asks how much Lee thinks about who the next chair might be.

Scott
Tom Lee

It's important because market needs to respect new Fed chair; Rieder's market experience makes him credible.

Fed has to communicate with White House and bond market.
Asks if Lee expects anything from Fed next week.

Scott
Tom Lee

Expects Fed to reiterate focus on job market not fighting inflation, which is a dovish tilt.

Even without cuts, a Fed not fighting inflation is dovish and wants economy to do well.
Asks if that explains equal-weight S&P outperformance vs. S&P and Nasdaq.

Equal-weight S&P up 4% vs S&P up 1% and Nasdaq up 1.5%.

Scott
Tom Lee

Yes, because Fed is no longer establishing inflation credibility (hawkish) and QT ending is like QE starting.

We are facing a dovish Fed even without cuts.
Notes Lee is generally bullish but still forecasts a potential bear market mid-year; asks for explanation.

Scott
Tom Lee

2026 has same contours as last year: good earnings growth but two transitions - new Fed being tested and policy uncertainty around tariffs.

Market always tests new Fed; policy uncertainty last year drove 20% S&P decline. Combination could create drawdown feeling like bear market from higher levels.

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