The U.S. stock market could face a correction from mid-October through the midterm elections, but a more supportive political and macroeconomic backdrop afterward could create stronger conditions for technology stocks and crypto assets, according to Tom Lee.
Lee expects the political environment following the midterms to potentially become more favorable for technology and digital-asset projects if Democrats adopt a more supportive position toward the CLARITY Act. He argued that a change in the composition of Congress could remove political obstacles for some technology and artificial intelligence initiatives, potentially providing an additional catalyst for the sector.
The outlook also depends on the Federal Reserve and the broader interest-rate environment. Lee said the latest jobs report has weakened the case for the most hawkish monetary-policy scenario previously priced into markets, including expectations for three potential rate hikes and a 75% probability of an October increase.
A softer inflation trajectory could further reinforce that shift. Lee expects temporary inflationary pressures to fade over the coming six months, potentially giving the Federal Reserve more room to moderate its hawkish stance.
Lower bond yields would be another important component of the potential risk-on setup. Lee said a decline in yields below 5% would likely be interpreted positively by markets, arguing that normalization in bond yields could improve conditions for risk-sensitive assets.
The combination of easing monetary-policy expectations, softer inflation and a potentially more favorable political environment could therefore create a stronger backdrop for technology and crypto markets after the midterm elections. However, the near-term correction Lee anticipates would represent a period of elevated sensitivity to political and macroeconomic developments.
Lee also maintains a constructive outlook for U.S. equities through the end of the year. He expects the S&P 500 to gain as much as 9%, potentially reaching a range of 8,200 to 8,400. His forecast is supported by expectations for accelerating corporate earnings growth, with third-quarter earnings potentially approaching 30% and 2027 earnings estimates more than 20% above their levels at the beginning of the year.
For risk assets, the key variables to watch are therefore the path of inflation, Treasury yields, Federal Reserve policy expectations and the political direction emerging from the midterm elections. A combination of softer inflation, lower yields and reduced political uncertainty could strengthen the case for a broader risk-on move, while a renewed rise in yields or a deeper equity correction would challenge that outlook.
