AI is revolutionizing the market: Tom Lee's analysis on software, employment, and opportunities

Artificial intelligence is not just a disruptive technology—it’s redefining entire economic sectors. Tom Lee of Fundstrat warns that software, a $450 billion industry that has dominated the global economy for decades, now faces an existential threat. The implications go far beyond a single sector, affecting employment, inflation dynamics, and investment strategies worldwide.

Why AI Threatens the $450 Billion Software Sector

Software has built the modern economic model. Companies of all sizes have delegated critical processes to software solutions, generating billions in annual revenue. But today, that dominance is waning. AI, with its ability to automate complex cognitive processes, is replacing what software used to do: solving problems and increasing efficiency.

Tom Lee explains the mechanism clearly: when software contracts as an economic category, the direct result is deflation. This is not a temporary contraction but a structural erosion of value. Companies that “once dominated the world” now face disruption not from competitors but from the very technology they revolutionized. Job losses will come quickly, following the typical cycle of accelerated technological transformation.

Current data already show signs of this dynamic. The annualized core CPI has fallen to 2.52%, aligning with pre-pandemic levels (2017-2019 average). This is no coincidence: AI acts as an inherently disinflationary force, reducing operational costs on a large scale and passing those savings to consumers in the form of lower inflation pressures.

AI-Induced Deflation and Its Implications for Rates

The inflation cycle is entering a new phase. The U.S. Federal Reserve recognizes this phenomenon: Jerome Powell has already begun adjusting employment estimates, subtracting 65,000 jobs from official reports, aware that subsequent revisions will reveal even worse numbers. However, the stock market is not panicking over employment data. Why? Because investors are already pricing in a higher reality: the number of jobs lost to AI in the coming years.

In this context of structural deflation and employment reduction, monetary policy is shifting toward accommodation. This is not surprising: when the economy faces deflationary pressures and employment shocks, central banks have historically cut interest rates.

Kevin Warsh and the New Accommodative Fed

Kevin Warsh’s appointment to lead the Federal Reserve initially sparked restrictive interpretations. Tom Lee believes that was a mistake. Warsh is not a hawk: rather, he represents a balanced stance, favoring lower rates but maintaining strict fiscal discipline. His positions remain anchored in a pragmatic view of the real economy.

Lee’s projection suggests that the current higher federal funds rates could converge toward the 1.5%-2.0% range seen in 2017-2019. This would open significant room for reduction, consistent with an accommodative Fed scenario. The combination of AI-driven deflation and employment shocks creates ideal conditions for a monetary easing cycle.

The Magnificent 7 Lose Favor: Rotation Toward Infrastructure

In 2024, the global stock market has seen massive capital flows into the “Magnificent 7”—Apple, Microsoft, Google, Amazon, Meta, Tesla, and Nvidia. These tech giants have been dubbed the “armies” of the AI revolution, driving stock indices and attracting substantial liquidity.

But now, the landscape is shifting. Capital is reallocating toward providers of the infrastructure needed to deploy AI: energy producers, industrial companies, electricity generators, and chip manufacturers. Tom Lee calls these players the “bullet makers”—just like in the gold rush, not necessarily the gold seekers profit most, but those providing the tools for the search.

This rotation will have significant consequences. Lee predicts a 10% to 20% decline in the U.S. stock market, driven by capital exiting the Magnificent 7 toward industrial and financial sectors. This trend is already visible in weekly liquidity flows.

However, there is a critical international dimension. The Magnificent 7 account for 55% of U.S. stock indices, creating unprecedented technological concentration. Foreign markets, on the other hand, maintain much higher weights in industrials, materials, and energy—exactly the sectors where global capital is flowing. This creates an asymmetry of opportunities: while the U.S. market undergoes a structural correction, international markets could benefit from the global reallocation toward infrastructure and industrials.

The Crypto Chapter: Deleveraging and Recovery Prospects

Tom Lee’s bullish forecasts for Bitcoin and Ethereum made in January have not materialized as expected. The crypto sector experienced a significantly sharper deleveraging shock in October compared to the FTX exchange collapse in November 2022. Two factors interrupted the potential recovery.

First, the announcement of tariffs triggered cascading liquidations just as crypto was beginning to recover. Historically, recovery phases follow a V-shaped pattern and take six to eight weeks. Washington’s communication tripled uncertainty and halted the natural cycle.

Second, the FOMO (fear of missing out) shifted toward other assets—particularly gold. Crypto investors experienced a psychological embarrassment staying in the sector while stocks and gold performed well. The rally in gold in January amplified this dynamic.

Despite these setbacks, Tom Lee believes the crypto sector “appears very close to a bottom because the fundamental narrative remains positive.” Consensus Hong Kong revealed a terrible sentiment, with investors doubting whether to hold crypto positions or diversify into gold. But this extreme pessimism, paradoxically, is the typical ground where recovery seeds are planted. Market cycle history suggests that when skepticism hits its peak, prices often bottom out and reverse.