Retail investors are poised to drive the next leg of the stock market rally as they begin moving capital back into equities following a period of war-related caution, according to Tom Lee, Fundstrat’s head of research.
In an interview with CNBC, Lee explained that while these investors initially pulled back during the buildup to the U.S.-Israel conflict with Iran, they are now “beginning to take money off the sidelines and buy stocks.”
He predicted retail investors will ultimately end up “chasing stock rally” for solid fundamental reasons, including rising earnings estimates.
The initial retail response to the Iran conflict was uncharacteristically risk-averse, breaking from the traditional “buy the dip” mentality that defined investor behavior during previous market disruptions like tariff concerns.
Lee attributed this hesitance to “policy puzzlement,” noting that investors “didn’t really know how big this war could become” and feared gasoline price (XB1:COM) spikes could trigger a recession.
“I think investors viewed the war, and the start of the war, as a time to take risk off the table,” Lee said, pointing to heavy selling in software stocks (IGV), (XSW) and the Magnificent Seven (MAGS) tech names.
While retail investors remained on the sidelines, hedge funds moved early to add risk back into their portfolios.
Lee confirmed this trend through Fundstrat’s client surveys and noted that the major “downside tail risks have been removed for the war.” This institutional activity has set the stage for retail participation to accelerate.
Despite ongoing public concern about gasoline prices (XB1:COM), Lee argued the U.S. consumer is in better shape than sentiment surveys indicate.
He emphasized that inflation-adjusted gasoline prices “aren’t nearly the burden they were five years ago, 10 years ago, even at the '08 peak.”
Furthermore, Lee noted that “the war is stimulating the economy,” pointing to improvements in earnings estimates, ISM data, and the jobs report as evidence of underlying strength.
Lee remains overweight on U.S. equities (SP500), (COMP:IND), (DJI), viewing the American market as the premier “growth index” for global investors seeking opportunity.
He highlighted that “the U.S.'s relative position has really been strengthened by what’s been exposed by supply chains through this war,” combined with continued American leadership in tech (XLK), healthcare (XLV), and fintech (FINX), (ARKF), (BPAY) innovation. Rather than seeing U.S. valuations contract, Lee believes the multiple should actually expand.
Looking beyond near-term challenges, including a new Fed chair transition, Lee offered a remarkably bullish long-term forecast.
He anticipates both earnings growth and multiple expansion could drive markets higher, predicting the coming 18-24-month period “might be one of the best we’ve ever seen in our life.”
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