Tom Lee says the April selloff has 'rebirthed a new bull market,' likes small caps for second half

Fundstrat's Tom Lee believes a new bull market began after April's capitulatory lows, characterized by a significant liquidation event and a VIX spike to 60. Lee anticipates shallow market dips ahead, driven by potential deregulation, future tax benefits, and an expected shift towards more aggressive monetary easing by the Federal Reserve in 2026; he favors a barbell strategy, initially overweighting the Magnificent Seven, then shifting towards small caps in the second half of the year as tariff concerns potentially subside.

Analysis

Fundstrat's Tom Lee posits that the U.S. equity market has entered a new bull phase following the capitulatory lows observed in April, which were marked by a significant liquidation event and a CBOE Volatility Index (VIX) spike to 60. This event, described as a "flush and reset," is seen as the genesis of this new bull market, following what Lee terms a "miniature bear market." He anticipates that any subsequent market dips will be relatively shallow, attributing this resilience to potential tailwinds from future deregulation, new tax benefits, and an expected shift by the Federal Reserve towards more aggressive monetary policy easing in 2026. Lee notes the current rally, like those following the Covid pandemic and the fall of 2022, is widely doubted but views the current market stage as a "mid-cycle kind of start." He advocates for a barbell investment strategy: an initial overweighting of the "Magnificent Seven" technology stocks (AAPL, MSFT, GOOGL, GOOG, AMZN, NVDA, TSLA, META) to capitalize on their ongoing comeback, followed by a strategic rotation into small-capitalization stocks in the second half of the year. This shift is predicated on the potential resolution of tariff risks, which could unlock investor flows into segments beyond large-cap tech. The Russell 2000 small-cap index has notably underperformed, declining over 7% this year while the S&P 500 (SPY) remained virtually unchanged, indicating a current investor preference for perceived safe havens over riskier, more indebted smaller companies. The overall market sentiment is strongly positive (0.8) and bullish, with a moderate market impact score (0.6), while individual Magnificent Seven components show positive sentiment (0.6).

Key Decisions for Investors

• Investors should consider Tom Lee's thesis of a new bull market and evaluate a barbell investment strategy, which involves near-term exposure to large-cap technology stocks (Magnificent Seven) followed by a potential rotation into small-cap equities.
• Monitor developments related to tariff resolutions, as this could be a key catalyst for a second-half rally in small-cap stocks, which have significantly underperformed year-to-date.
• Factor in the expectation of shallow market dips and long-term bullish drivers, such as potential deregulation, tax benefits, and anticipated Federal Reserve monetary easing starting in 2026, when assessing portfolio risk and allocation.
• Acknowledge the prevailing skepticism or "hated rally" sentiment as a characteristic often observed in early to mid-stages of bull markets, according to Lee's analysis.