Why the AI Sell‑off May Be Over: Tom Lee’s Near‑End Forecast for Nvidia & the Mag 7
- You missed the bottom of the AI panic, and now the rally could be starting.
- Fundstrat’s Tom Lee believes the sell‑off in Nvidia, the Mag 7 and crypto is in its final weeks.
- The January Barometer hints at a February pull‑back, but a strong March‑April upside.
- Energy (XLE) and basic materials (XLB) are positioned for outperformance through 2026.
- Bear‑case risks include renewed regulatory shock and a surprise earnings miss from any Mag 7 member.
You missed the bottom of the AI panic, and now the rally could be starting.
Why Nvidia’s Earnings Surprise Isn’t Translating to Immediate Rally
On Thursday Nvidia posted record quarterly revenue and a net‑income surge that comfortably beat consensus estimates. Yet the stock barely nudged higher, trading at less than 20× forward earnings – roughly half of the multiple Costco enjoys. The muted reaction reflects a market that has already priced in a “new normal” for AI‑related hardware. Investors are shifting from the hype‑driven frenzy to a more disciplined appraisal of growth versus valuation.
Key definition: Forward earnings multiple = current price divided by projected earnings for the next twelve months. A lower multiple can indicate cheaper valuation relative to peers.
What Tom Lee’s Bottom‑Signal Means for the Mag 7
Fundstrat co‑founder Tom Lee told clients that the “AI scare trade” is nearing its end. He points to the viral Citrini Research post that sparked a wave of panic earlier in the week as a classic “bad‑news bottom”. According to Lee, software stocks (the broader IGV index) bottomed on Feb 23, and the Magnificent Seven – Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla – have already reclaimed roughly 95% of the decline that triggered the rotation out of growth names.
Lee’s confidence stems from three observations:
- Bad‑news sentiment has peaked, and no fresh catalyst has emerged to push the sell‑off deeper.
- The “January barometer” – a historical pattern where a strong first‑week S&P 500 rise predicts a modest February pull‑back – suggests that February’s median decline of 0.4% is likely, paving the way for a 2% average gain in March.
- Macro‑sector rotation is shifting from over‑exposed AI hardware to undervalued energy (XLE) and basic materials (XLB) that have rallied this year.
Sector‑wide Implications: Software, Energy, and Materials
The software sector has endured a brutal 20%‑plus slide since the AI hype peaked in late January. With the bottom apparently set, valuation metrics are normalising. Companies like Microsoft (MSFT) and Salesforce (CRM) are now trading at forward P/E ratios that are 30‑40% below their 2023 highs, offering attractive entry points for long‑term growth investors.
Energy (XLE) and basic materials (XLB) have outperformed the broader market this year, driven by higher commodity prices and a renewed focus on energy security. For investors who missed the AI swing, reallocating a modest portion of the portfolio to these defensive yet cyclical sectors can boost diversification while capturing the upside from a potentially stronger 2026 macro environment.
Historical Parallel: 2018 AI Hype Cycle and Its Aftermath
In 2018, a wave of AI optimism propelled a handful of chip makers and software firms to double‑digit gains, only to see a sharp correction when earnings failed to meet inflated expectations. The correction lasted roughly six months before a more sustainable growth trajectory emerged. The current cycle mirrors that pattern: a rapid ascent, a media‑driven panic (the Citrini piece), and now a tentative bottom.
Investors who entered at the bottom of the 2018 correction realized an average 180% total return over the subsequent 18 months. If the present bottom is genuine, a similar upside could be on the horizon for the Mag 7.
Technical Lens: Reading the January Barometer
The January barometer is a seasonal indicator: when the S&P 500 gains in the first week of January and ends the month positive, February historically delivers a modest decline (median –0.4%). Conversely, a weak start often presages a stronger February. In 2024, the S&P 500 rose 1.5% in the first week and 1.3% for the month, suggesting the median‑decline pattern is likely. Traders can therefore anticipate a brief dip in February, followed by a historically strong March (average +2%) and an even better April.
Investor Playbook: Bull vs Bear Cases
Bull case: The AI sell‑off is truly over. Nvidia, Apple, Microsoft and peers resume earnings‑driven growth, pushing the Mag 7 back to 2023‑like multiples. Crypto assets, particularly Ethereum, complete their retracement cycles (90% of the 2020‑2025 decline) and rebound, delivering double‑digit gains. Energy and materials sustain momentum, supporting a diversified “growth‑plus‑value” portfolio that could outperform the S&P 500 by 4‑5% annually.
Bear case: A new regulatory shock (e.g., tighter AI data rules) or an unexpected earnings miss from any Mag 7 constituent reignites risk‑off sentiment. The January barometer’s February pull‑back deepens into a 2%‑3% decline, eroding confidence in the rebound. Crypto remains depressed, and energy faces a supply‑glut correction, leaving investors exposed to a prolonged period of underperformance.
In practice, a balanced approach works best: maintain core exposure to the Mag 7 at a reduced valuation, allocate 15‑20% to energy and materials ETFs (XLE, XLB), and keep a modest speculative slice (5‑10%) in Ethereum and Bitcoin to capture potential tailwinds from the retracement completion.