By Todd Campbell

The stock market has gone on a wild ride in 2025. 

After back-to-back years of 20% plus returns and the S&P 500 reaching all-time highs in February, a string of tariff announcements by President Donald Trump sent stocks tumbling nearly 20% through early April.

The decline left many nervous that more losses were likely, as investors updated valuation models to account for increased inflation and recession risk, and potentially lower corporate profits.

However, instead of more losses, the market reversed, heading sharply higher. The S&P 500 gained almost 20% since April 9, when President Trump paused most of the reciprocal tariffs announced on April 2.

The rally surprised many investors, but Fundstrat's Tom Lee wasn't among them. Lee has navigated the markets since the 1990s, correctly predicting the bear market bottom in 2023 and rally in 2024. More recently, he said in April that stocks would likely look past tariffs and head higher, an opinion that proved particularly prescient.

Of course, stocks don't go up in a straight line, and things have gotten a little tougher recently. Israel's missile attacks on Iran — and Iran's response — increased oil prices last week, and geopolitical risks ratcheted even higher when the U.S. bombed three Iranian nuclear facilities over the weekend.

Given the latest news, Lee revamped his outlook, offering up a new stock market forecast. 

FundStrat Global Advisors Managing Partner Tom Lee has updated his stock market outlook after the U.S. strikes on Iran. Image source: Cindy Ord/Getty Images

Stocks are digesting a lot of bad news

The Federal Reserve has had its work cut out for it over the past few years. In 2022, it launched the most hawkish monetary policy since the 1980s after inflation spiked following Covid-era stimulus payments and zero interest rate policy.

The rate hikes successfully muscled inflation to below 3% from over 8%, but inflation progress has stalled, and newly enacted tariffs have many expecting inflation will increase in the coming months.

That possibility has boxed the Fed in. Unemployment has climbed to 4.2% from 3.4% in 2023, and normally, that increase would support interest rate cuts.

However, with inflation already worrisome because of tariffs, the Fed has taken a wait-and-see approach this year, nervous that cuts would cause inflation to move up even more.

The decision to keep rates at their current 4.25% to 4.5% level could backfire, pushing the Fed behind the curve, given the economy is also showing worrisome signs.

In May, both the ISM Manufacturing and Services PMIs were below 50, signaling contraction. Further, consumer confidence, while rebounding from its April low, is still troublesome.

The Conference Board's Expectations Index was 72.8 in May, below the threshold of 80 that typically signals a recession ahead.

The potential for the U.S. economy to slow isn't lost on economists. The World Bank reduced its outlook for U.S. GDP to 1.4% this year, down from 2.8% growth in 2024. The Fed similarly predicts 1.4% growth, down from 2.1% in December.

Tom Lee updates stock market outlook

Lee's long experience in the market means he's navigated the Internet boom and bust, the Great Financial Crisis, and the Covid-drop.

His been-there-done-that background helped him predict that the bear market would end in 2022, setting the S&P 500 up to rally in 2023, and that stocks would continue to climb in 2024, even as many thought it would stall. 

While geopolitical risks in the Middle East increase uncertainty, Lee doesn't necessarily think that markets will decline as a result, and he wasn't surprised that the S&P 500 trended higher on Monday. 

"Markets were already kinda nervous and anxious, and we already saw de-risking and the VIX was already elevated, so I think in some ways this is probably pretty typical," said Lee in a CNBC interview. 

Often, stocks price in the hews beforehand, supporting the old Wall Street saying, "sell the rumor, buy the news." In this case, Lee cited a quip from long-time NYSE floor trader Art Cashin, "sell the buildup, buy the invasion" as to why he wasn't shocked that stocks moved up.

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Lee wouldn't be surprised if stocks continued their winning ways, either. While he sees some speculative fervor building, including a return of SPAC listings and names like Circle Internet surging 74% over the past five days on passage of stablecoin legislation, he thinks the market isn't nearly as stretched as it was when speculation ran rampant in 2021.

"There’s actually a lot less risk taking by institutional investors," said Lee. "High net worth is not really that invested, and institutions are still pretty cautious.”

Lee said that the macro backdrop isn't nearly as concerning as it could be, saying that there's more visibility on tariffs and "we have regulation and tax legislation visibility into 2026." He also noted that consumers expect inflation in the future to be much higher than it is today, providing plenty of opportunity for positive surprises. 

"With all the cash on the sidelines, I would say we should be quite bullish, actually," concluded Lee.

This article was first featured on Thestreet