Fundstrat's Tom Lee: July will be stronger for stocks as valuations become more reasonable

Fundstrat’s Tom Lee argues July should mark a turn higher for U.S. stocks as the S&P 500’s P/E has compressed by ~1.1 turns since January, giving room for multiples to expand while Q2 earnings could surprise to the upside. He frames upside into year-end of roughly 8,000 to 8,800 (citing a potential ~22+ P/E on 2026 earnings), but warns of a drawdown that could “feel like a bear market” between now and year-end tied to the Fed chair’s inflation framework and a gradual liquidity overhang from SpaceX share unlocks. Meanwhile, flows show $24.95B net inflows into SPY during a down week and options positioning via put-spread collars, with VIX easing (to ~15.56 from ~19.95) but SKEW rising—signaling tail-risk hedging even as volatility cools.

Analysis

The near-term setup is less about valuation starting cheap and more about forced flow: underperforming managers tend to buy the same winners on the way up, which can keep a July melt-up intact even if macro is only mediocre. That favors SPY and the most market-sensitive financial franchises, especially GS, because higher index levels and trading activity can translate into better capital-markets and flow revenue before any real economic acceleration shows up.

The bigger second-order risk is that the rally depends on stable real yields, not just decent earnings. If CPI/PCE or Fed messaging nudges rates higher, multiple expansion can reverse faster than earnings can catch up; that is the cleanest way the thesis breaks over days to weeks. By contrast, a disappointingly soft tape into late summer would likely show up first in volatility pricing and de-grossing, not in a fundamental recession call.

Contrarian view: consensus may be overestimating the durability of 2026 EPS quality while underestimating how crowded the dip-buy becomes after a weak June. The market can keep levitating on positioning, but if revisions breadth narrows or VIX reclaims the 20 area, the move is probably becoming a liquidity trade rather than a fundamental re-rating. That would be the tell to shift from beta longs to downside hedges.

Key Decisions for Investors

• Tactical long SPY via a 1-2 month call spread after any 1-2% pullback; target a continuation rally into earnings season, but exit if VIX closes above 20 for several sessions or rates reprice higher.
• Long GS vs short C as a relative-value expression for a flow-driven tape; GS has more operating leverage to equity issuance, trading, and sentiment-chasing, while C is less levered to a broad market re-rating.
• Buy a modest SPY Sep/Oct put spread as a hedge against the late-summer volatility window; this is a cleaner way to express the 'bear market feel' risk than outright shorting the index now.
• If Q2 earnings breadth disappoints or guidance revisions turn negative, fade the rally by reducing SPY exposure first; earnings misses will hit crowded beta names before they hit the macro story.