This round of new highs in US stocks saw retail investors collectively miss out! Major bull Tom Lee: The next wave of gains will be led by them.

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Retail investors have largely missed out in the latest V-shaped rebound of the US stock market, but this may actually be building momentum for the next stage of the market.

The S&P 500 closed at yet another record high on Wednesday, ending at 7022.95 points, marking its fifth new high this year.

However, this rally has not seen widespread participation from retail investors—they chose to sell when the market bottomed, and remained bearish even after the rebound began. Wall Street bull and Fundstrat head of research Tom Lee believes that it is precisely these sidelined retail investors who will become the key fuel driving the index higher.

According to a previous article by Wallstreetcn, a JPMorgan Retail Radar report indicates that retail investor behavior has fundamentally shifted: from the previous "buy the dip" mode to "sell on rallies," with an increased defensive stance. This change means that a large amount of capital has yet to enter the market; once sentiment reverses, the potential demand for buying back in should not be ignored.

Retail investors left behind: From "buy the dip" to "sell on rallies"

The outbreak of conflict between the US and Iran broke the more-than-a-year-old "buy the dip" habit of US retail investors. As previously reported by Wallstreetcn, JPMorgan’s mid-March Retail Radar report showed "continued signs of weakness" among retail investors, an extremely rare sign according to the bank's records.

At the beginning of April, news of a ceasefire drove a market rebound, but retail investors did not respond by buying in—they chose to reduce their positions. Another JPMorgan report at the time noted that retail investor behavior had shifted from "buy the dip" to "sell on rallies," with a clear skepticism toward the sustainability of this rebound.

In his Wednesday "Macro Minute" video, Tom Lee explained: Since 1929, US stocks have often seen V-shaped recoveries, but many non-institutional investors are unaware of this, habitually expecting that a rebound will take longer. Therefore, when hedge funds are buying aggressively at lows, retail investors are accelerating sales, hoarding cash, and clinging to their bearish views even as the market reverses, ultimately missing this surge.

Tom Lee’s Four Reasons: Why the Market Has Bottomed

Tom Lee listed four reasons why the 6,344-point low on March 30th marks the bottom for the S&P 500 in this cycle.

First, the "fog of war" effect. He points out that, as seen throughout history (e.g., WWII), the stock market usually bottoms at the onset of conflict, not after the situation becomes clear.

Second, the market tends to bottom during bad news, not after good news emerges. Investors waiting for positive signals are usually too late to enter the market.

Third, "No one rings a bell at the bottom." Tom Lee emphasized that there was no apparent catalyst at the March 30 low; "the market simply stopped reacting to bad news," which itself is a sign of a bottom.

Fourth, wartime spending has a positive impact on the economy, and profit expectations have been raised accordingly.

"All of this is typical of the 'most hated V-shaped rebound,'" said Tom Lee.

Who will lead the next stage of the market

Fundstrat believes that the sectors which have outperformed since the war broke out will continue to lead the subsequent recovery.

Tom Lee specifically mentioned tech stocks—especially the Mag 7. Industrial and financial stocks were also listed as preferred options at market lows.

Scott Rubner from Citadel Securities verified signs of a retail comeback from a different angle.

In an independent report, he pointed out that retail participation has started to recover in recent trading days, as evidenced by an increase in individual stock trading activity (as opposed to the previous focus on ETFs and indices). Rubner believes that retail investors’ previous hesitation may have partly been due to tax obligations after the fruitful market in 2025; as tax season pressure fades, funds are likely to flow back into the market.

Missed-out capital may act as a catalyst for upside

Taken together, the widespread absence of retail money has formed a potential positive feedback mechanism in market structure: the more funds are on the sidelines, the stronger the chase-buying force once sentiment reverses.

The S&P 500 has hit a record high five times this year, yet retail investors remain defensive overall. If this capital eventually re-enters the market, the "most hated V-shaped rebound" Tom Lee described may gain a new round of momentum.

Risk warning and disclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the individual investment goals, financial circumstances, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are appropriate to their particular situation. Investing according to this information is at your own risk. ```