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Now to our panel, CNBC contributor, Fundstrat's Tom Lee, Humana's Brian Belski. It's good to have both of you here on set. I mean, Tom, you see the activity in the microns and the snowflakes and and you think what as you watch this market? Well, I I think it was a great conversation with Liz, but one thing to keep in mind is now that Q1 earnings is behind us, people thought S&P earnings would be $70.
It's going to come in at 80. So, that's a $10 beat. That's $40 annualized. That means that this added the upside to earnings is somewhere between 800 and 1,000 points of S&P upside. I think the entire rally since April could be explained by just the Q1 earnings beat. You're You're calling for a three-phase market still.
Explain to our viewers again what what what that means. Yes, our base case for this year, which we expected it to be a challenging year and it feels like it, is we would rally towards 7,300 initially. Now, we're above that, but I think 7,600. Yeah, and I think we can get to maybe 77, as high as 77, but I think then we're going to digest a lot of things until October.
And that's a new Fed chair. It's the energy shock that Liz talked about, especially shortages of petroleum products and lubricants. You know, AutoNation talked about it. And the third is the IPOs of SpaceX, OpenAI, and Anthropic that when the unlocks happen, that's a lot of extra supply. So, I think that could pressure stocks in a way that feels like a bear market.
But then post-midterms, I think we rally strongly in and 2027 is a year where we might see some of the best returns we've ever seen in our lifetime. Brian. So, you had the benefit of listening to Liz Ann and now Tom's answer. Is it How does it match up with what you're thinking? It doesn't differ that much because when we came out with our year-ahead piece for 2026, we explained to investors that the market environment in 2026, Scott, will to very different than the last two years or three years of the bull, meaning it's going to be an earnings-driven market.
Earnings-driven markets are much more volatile than momentum-driven markets, what what Tom's done an amazing job talking about. But, they also reward in both directions. If if if, like Liz says, and what I think is ultimately going to happen, is that you start to see a diminishing and deceleration of the large-cap stock EPS.
You're going to have some fear, Scott, and people are going to act on that. That's kind of number one. Number two, it also says that you have more corrections during an earnings-driven market. And we've been saying that we're going to have some sort of a correction. I don't think it's going to be quite a bear market, but to the tune of 5 to 10% heading into the fall.
And then we finally have our broadening out theme. I still am a big believer in the broadening out theme, and I think that's what's going to really drive things into 2027. have a correction? Do you mean like earnings earnings are not going to live to to the moment, and that's going to cause the correction?
There's got to be a mechanism, theoretically. So, if you think about how great the earnings have been, and Liz nailed it when she said, "If it's any kind of blush of any kind of change in tone for management, they go from a 30% gain in earnings down to 20%, that's a big deal." Even though 20% is an amazing earnings gain, but that's going to scare people enough to sell.
The other thing, too, is that what was lost in what she said was very, very important. When you run money in portfolios, you can either let your portfolio drift with the market, or you set your back to your original weight. I think it's going to be very, very important over the next 4 to 6 weeks to set back to the original weight, especially considering how far stocks have have gone.
You've got some stocks that have doubled, and now are bigger in weight than some of the Magnificent 7s in your portfolio, and that's a problem. feel like when you look at a snowflake go up 40% in a day, or the Microns, you know, the these moves as as I've described them, used to be special. You know, you'd see this once a who knows a few years for a name now they're becoming routine.
And that's a problem. That's a problem because now we're becoming used to it and anytime in the market you get used to it you get lazy and that's where we could see that correction beginning to reverse and that could really spew more downside. What what's going to push money towards the other parts of the market?
Does it have to be the the end of the war? Oil has to come down. Yields have to come down even further. Do we need you know a signal from a Warsh now Warsh led Fed in mid-June that well, the market may be pricing in a hike we could actually cut rates. I mean I I you know, if I took a step back oil has moved in a way and it's created inflation in a pipeline in a way that financial conditions have to tighten later this year.
So, I think the bond market is pricing in a hike now instead of easing. And I think as long as that's what the bond market's pricing it it is tougher for a lot of groups to rally because most groups need a dovish Fed. but if the if if some people say well, the bond market leads the Fed with a new chair with a decidedly different view on not only the mechanics of inflation but the dealing with you know, how how he wants to put his own stamp on this on this that maybe this is the Fed that's going to lead the market.
Like maybe the market's wrong. Yeah. I mean that's Can you see a Kevin Warsh led Fed with with he as chair hiking rates anytime in the near future? I think Kevin Warsh has a very difficult task because the bond market already has its template. Uh he wants to cut rates but shrink the balance sheet so there's a lot of sterilization taking place there.
It's almost as if someone takes over the role of CEO of a company and says, "We've got a new way of telling our story." Investors will be skeptical at first, and I think that's why the market will test this bet.
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