Artificial Intelligence Revolutionizes Markets: Tom Lee's Perspective on Software, the Fed, and Global Opportunities

Fundstrat analyst has issued a significant warning about the transformation of the global economic landscape, predicting that artificial intelligence technology is creating a deep fracture in financial markets. According to his forecasts, the Federal Reserve will adopt a more accommodative stance, while capital flows are redirecting toward entirely different sectors.

How AI is Transforming the Software Sector and Employment

In an interview with CNBC, the analyst emphasized that artificial intelligence is “disrupting the $450 billion software industry,” with employment consequences already on the horizon. Software companies, once “dominating the world,” now face an existential threat due to AI replacement.

The compression of this sector will have a deflationary effect on the economy. From this perspective, AI acts as a factor reducing prices and inflationary pressures. Core inflation data on an annual basis is expected to stabilize around 2.52%, reaching pre-pandemic average levels from 2017-2019. This scenario provides the Federal Reserve with the space to cut interest rates.

Fed Chair Jerome Powell is already making downward revisions to monthly employment figures—about 65,000 jobs lost per month—as subsequent data confirms the negative trend. Investors seem not to be overly concerned with current employment data but are questioning how many more jobs will be eliminated by AI advancements in the coming years.

Warsh’s Appointment and Accommodative Monetary Policy

Kevin Warsh’s appointment to the Federal Reserve was initially interpreted by the market as a hawkish move, but the analyst considers this interpretation incorrect. An administration would not appoint a “hawk” to such critical positions. Warsh advocates for lower interest rates while maintaining a disciplined federal balance sheet.

Considering the context of declining employment and the AI shock across multiple sectors, the Federal Reserve should adopt an easing monetary policy. During 2017-2019, Fed funds rates ranged between 1.5% and 2.0%, suggesting “ample room for reduction” compared to current levels.

Capital Rotation: From Tech Giants to Infrastructure

The AI revolution is triggering the largest capital reallocation of the decade. Last year, investors concentrated their positions in the “Magnificent 7”—Apple, Microsoft, Google, Amazon, Meta, Tesla, and Nvidia—considered the “armies” leading the technological transformation.

However, the landscape is changing dramatically. Capital is shifting toward companies providing the infrastructure needed to build AI: energy suppliers, industrial manufacturers, power generators, and semiconductor producers. These “foundation builders” are attracting billions in capital expenditures, while software companies—original disruptors of the sector—risk becoming the main victims of the transition.

International Markets Emerging as Winners of the Transition

This reallocation will cause a pullback in the U.S. stock market of 10% to 20%, with capital retreating from the Magnificent 7 and flowing into industrial and financial sectors. Surprisingly, this scenario significantly favors foreign markets.

The Magnificent 7 account for 55% of U.S. stock indices, creating excessive concentration in the tech sector. In contrast, international indices maintain a diversified composition, weighted toward industrials, materials, and cyclical sectors—precisely where new capital flows are directed.

Cryptocurrencies: The Bottom Approaching Despite Turmoil

The analyst’s bullish forecasts for Bitcoin and Ethereum in January did not materialize. The crypto market experienced a deleveraging shock larger than the FTX crash of November 2022.

Two factors interrupted the recovery. First, an announcement regarding trade tariffs in early October triggered significant liquidations. Just as the crypto market was beginning to recover—recoveries typically follow a V-shaped trajectory lasting six to eight weeks—new political turbulence caused another cascade of sell-offs.

Second, market psychology shifted toward other asset classes. Crypto investors felt “embarrassed” to remain exposed to the sector while equities and gold outperformed. The gold rally in January amplified this psychological rotation.

Despite these recent setbacks, the analyst believes that the cryptocurrency sector “is very close to finding a bottom because the fundamental story remains positive.” During the Consensus conference in Hong Kong, investor sentiment was “terrible,” with participants torn between staying in crypto or reallocating resources to gold. However, long-term fundamentals suggest opportunities for those who maintain a patient outlook on the digital market.