If you're looking for a calm, predictable year in the markets, Tom Lee has some bad news for you. The head of research at Fundstrat Global Advisors is forecasting what he describes as a year of "joy, depression, and rally" for 2026. Sounds exhausting, right? But there's a method to this volatility.

A Rocky Road to 7,700

During his Monday appearance on CNBC's "Squawk Box," Lee laid out his vision for the S&P 500's path forward. He's sticking with his call for the index to reach 7,700 by the end of 2026, but warns that getting there won't be a smooth ride. Expect a correction of somewhere between 15-20% during the latter half of the year.

That's quite the rollercoaster. Lee acknowledges this volatility mirrors what markets experienced in 2025, and he points to Federal Reserve rate policies as a key driver of these swings. Still, he's optimistic about several tailwinds, including the one-year anniversary of tariff implementations, anticipated Fed rate cuts, and a potential recovery in the ISM manufacturing index.

The Small Cap Opportunity

Here's where it gets interesting. Lee isn't just making a broad market call. He's specifically highlighting sectors that have lagged as the potential engines of growth ahead. Energy, financials, and particularly small caps are where he sees opportunity.

Small caps already notched all-time highs in 2025, and Lee believes lower interest rates will continue benefiting these companies. "Monetary easing, earnings growth is starting to look better, and if we have mergers, I think all of these are tailwinds for small caps," Lee stated.

He's not alone in this thinking. Louis Navellier, the veteran investor and CIO of Navellier & Associates, recently advised investors to focus on stocks with strong earnings growth as the market potentially experiences a "big flip" in January. This rotation could provide additional support for the S&P 500's climb that Lee envisions.

Five Reasons to Believe

Bank of America is singing from the same hymn sheet. The investment bank expects small caps to outperform both mid and large caps in 2026, outlining five specific catalysts: improving earnings momentum, a capital expenditure cycle boosting revenues, Fed rate cuts easing financing pressures, lower tariffs and deregulation expanding margins, and attractive valuations supported by favorable investor positioning.

When multiple strategists start converging on the same thesis, it's worth paying attention. The confluence of monetary policy support, earnings improvements, and valuation opportunities creates a compelling backdrop for smaller companies.

Price Action: Over the past year, Invesco QQQ Trust, Series 1 (QQQ) and Vanguard S&P 500 ETF (VOO) climbed 16.89% and 14.74%, respectively.