The sell-off in AI-related trades and crypto assets may be approaching a temporary bottom after a period of intense selling pressure. Tom Lee, Managing Partner and Head of Research at Fundstrat, believes the pullback in software stocks, the Magnificent 7, and cryptocurrencies has entered its "final weeks."

This assessment comes as Nvidia reported "solid" earnings, yet the market reaction remained subdued. Nvidia CEO Jensen Huang publicly stated that the market's sell-off in the software sector is a "mistake." Whether this view gains traction among investors will directly influence the pace of sentiment recovery across the AI sector.

In a video briefing to clients, Tom Lee indicated that markets often bottom on "bad news." A viral, doom-laden post about AI from Citrini Research earlier this week unsettled sentiment, but Lee suggests such shocks may signal that a bottoming process is underway.

Strategically, he pointed to the "January Barometer" for support: after the S&P 500 gained 1.5% in the first week and 1.3% for the full month of January, February is often a "give-back month" with a median decline of approximately 0.4%. This could be followed by strength in March, with an average gain potentially reaching 2%, and even better performance possible in April.

Lee's core thesis is that bottoms form on bad news. He highlighted the impact of Citrini Research's viral bearish content, interpreting it as a sign the market decline may be in its late stages. He believes the rotation out of crowded core trades is nearing an extreme, suggesting marginal selling pressure is diminishing. He told clients the decline in the Magnificent 7 is "about 95% complete," the sell-off in software is "roughly 99% done," and the cryptocurrency pullback is in its "final weeks."

For the AI trade, sentiment recovery hinges on resolving the divergence between strong hardware and weak software performance. Jensen Huang's comment that the market is "wrong" about software provides a clear contrarian signal for the software segment.

Lee also assessed Nvidia's fundamentals and valuation, noting its record quarterly revenue and strong net profit. He highlighted that the stock trades at a forward P/E ratio below 20x, "about half the valuation of Costco." From a trading perspective, he emphasized that software stocks have risen for two consecutive days, suggesting February 23 marked a near-term bottom, while the rebound in the Magnificent 7 since February 17 aligns with the view that selling pressure is abating.

In crypto markets, Lee maintains a bullish stance, believing the current downtrend is nearing its end and specifically forecasting a rebound for Ethereum. It is important to note that Lee is also Chairman of BitMine, an Ethereum treasury company. This affiliation may lead the market to interpret his views as a stronger conviction, and investors should consider potential conflicts of interest when evaluating his predictions.

Regarding sector allocation and style, Lee continues to advocate for his pro-cyclical 2026 thematic framework, citing energy and basic materials as previously emphasized sectors that have already risen this year. He also believes industrials, financials, and small-cap stocks are positioned to perform well in a "stronger 2026." Simultaneously, he remains bullish on his core long-term holdings, including the Magnificent 7, Bitcoin, and Ethereum.

Lee has been viewed as a relatively accurate market forecaster, having recommended buying stocks at the pandemic lows and capturing the 2023 bull market. However, he has also issued more aggressive price targets for crypto assets, including stating that Bitcoin could "easily reach $200,000 by the end of 2025" and potentially rise to $1 million within the next few years.