Wall Street Permabull Tom Lee Sees Third Great Labor Shortage Era as AI Gains Momentum

Tom Lee, a prominent Wall Street analyst, has outlined a bullish yet volatile outlook for the U.S. stock market in 2026. He expects the S&P 500 to reach 7,700 by year-end, with potential for a 15–20% correction later in the year according to market analysis. Lee attributes this forecast to factors including the anniversary of tariffs, Federal Reserve rate cuts, and the rebound of the ISM index as reported by analysts.

The market is already showing mixed signals. While the S&P 500 ended 2025 up 16%, some key enterprise AI players like C3.ai are struggling. In Q2 2026, C3.ai reported $75 million in revenue, down 20% year-over-year. Subscription and license revenue remain below historical levels, with only 20 initial production development (IPD) contracts signed according to financial reports.

Despite these challenges, C3.ai’s cash position remains strong at $675 million as of latest data. However, the firm expects a significant FY26 loss near $200 million according to forecasts. For investors, the key question remains whether the new CEO can reinvigorate subscriptions and IPD growth. Analysts currently provide an average target price of $17.17 for C3.ai, with a high estimate of $40.00 and a low estimate of $8.00 according to market research.

Why Did This Happen?

The AI sector is facing structural challenges. C3.ai’s Q2 revenue, while slightly above estimates, still highlights a broader slowdown in enterprise AI adoption. Subscription revenue has not returned to peak levels, and professional services revenue has fallen to $4.9 million in the quarter according to financial data. This points to cautious demand and delayed implementation by enterprise clients as analysts note.

BigBear.ai and other AI-focused firms are also struggling with macroeconomic and competitive pressures. BigBear.ai’s revenue is projected to decline in 2025 due to disruptions in government contracts and fixed-price project structures according to market analysis. Meanwhile, Palantir and C3.ai remain key competitors, with Palantir showing stronger balance sheet and revenue performance as reported by financial sources.

How Did Markets React?

Investor sentiment has been divided. C3.ai is currently trading at a market cap of roughly $2 billion and enterprise value of about $1.3 billion, near 4x projected FY26 sales according to trading data. This implies limited downside if operations stabilize, but little room for error if growth fails to accelerate.

For AI-focused investors, the broader market environment is positive. According to The Motley Fool, over 60% of Americans believe companies investing heavily in AI will deliver strong long-term returns as cited in research. Younger investors, in particular, are more optimistic about the potential of AI, with 67% of Gen Z and 63% of Millennials expressing confidence according to survey results.

What Are Analysts Watching Next?

Several key factors will shape the AI sector in 2026. First, enterprise adoption of AI solutions will need to pick up. C3.ai’s new CEO must demonstrate progress in growing subscriptions and IPD traction, while also improving margins according to analyst expectations.

Second, the Federal Reserve’s rate policy remains a wildcard. Philadelphia Fed President Anna Paulson has signaled potential rate cuts later in the year but emphasized that the current rate remains “a little restrictive” according to policy statements. This means investors must balance expectations for lower borrowing costs with potential inflation risks.

Third, the broader market is looking to AI-driven companies to deliver on valuation growth. Analysts expect AI to continue driving innovation, particularly in enterprise software and government applications according to market forecasts. However, questions remain about whether AI spending will translate into consistent revenue and margin improvements as noted in economic reports.

Tom Lee’s bullish case for small caps also aligns with broader market trends. He believes lower interest rates will benefit smaller firms, particularly those in energy, financials, and AI-related sectors according to market analysis. Small caps hit an all-time high in 2025 and are expected to outperform larger peers in 2026 as reported by analysts.

For now, investors are keeping a close eye on C3.ai and other AI leaders as they navigate valuation challenges and growth opportunities. The market remains speculative, but with enterprise AI adoption on the rise, the path to long-term returns could hinge on execution and innovation.