Stocks are poised to reach new highs in August as artificial-intelligence deleveraging nears completion, according to Tom Lee, head of research at Fundstrat, who sees the S&P 500 potentially hitting 8,000 by month’s end. Lee outlined six reasons for optimism about equity markets in the coming weeks, anchored by the unwinding of excess AI-trade leverage that he estimates is 95% complete.
The deleveraging of AI positions has been a key source of market volatility, but Lee said a turning point came when Citadel acquired an AI-heavy hedge fund portfolio, signaling major players are stepping in to support the market. With that crucial unwind nearing its end, Lee argues that consolidation in equity prices creates a healthy setup for investors to respond to positive catalysts.
Beyond the AI deleveraging, Lee identified several other factors supporting a stock rally in August. South Korean policymakers responded to a sharp drop in that nation’s benchmark index by implementing interventions, including new restrictions on leveraged exchange-traded funds. Lee noted that “markets stop panicking when policymakers stop panicking,” quoting billionaire hedge-fund manager David Tepper. This pattern of official support can help restore investor confidence globally.
Strong earnings momentum also provides a foundation for gains. Halfway through the second-quarter earnings season, analysts have raised S&P 500 earnings-per-share estimates for next year by $7, which lowers forward price-to-earnings ratios and makes stocks more attractive. For the full 2026 calendar year, S&P 500 earnings are now expected to grow 29.1%, according to FactSet, with 86% of companies that have reported beating earnings-per-share estimates.
Lee also cited expectations for dovish inflation and wage data in July as a catalyst. He believes that figure will show inflation is weakening, particularly in categories like airfares, shelter, apparel, and recreation, which together account for 74 basis points of the current overshoot above the Federal Reserve’s 2% target. If those components cool, inflation moves closer to the Fed’s goal without requiring aggressive rate hikes.
The Fed’s next meeting is not until September, which Lee said removes a near-term policy uncertainty. The market is currently pricing in about a 60% probability of a rate increase next month, according to the CME Group’s FedWatch tool, but Lee does not expect the Fed to hike. He argues that even if the central bank raised rates by 25 to 50 basis points, hyperscalers pursuing AI infrastructure buildouts would likely continue their capital spending plans.
The S&P 500 has been essentially flat over the past two months, down 1% since the beginning of June, while the Nasdaq has declined about 2%. Lee views this consolidation as a healthy pause before the next leg higher, provided the economy remains sound. His August target of 8,000 for the S&P 500 would represent a meaningful rally from current levels, and his forecast reflects confidence that the tailwinds from AI infrastructure investment and strong earnings will outweigh near-term headwinds.
Sources
- Morningstar — Tom Lee’s six reasons stocks could reach new highs in August, including AI deleveraging at 95% completion and Citadel’s acquisition of an AI hedge fund portfolio
- CNBC — Tom Lee’s forecast that the S&P 500 could hit 8,000 by end of August 2026
- FactSet — S&P 500 earnings expected to grow 29.1% for calendar year 2026, and 86% of reported companies beating EPS estimates in Q2
- CME FedWatch — Probability of Federal Reserve rate hike in September at 60%
