Veteran market strategist Tom Lee signaled that the US stock market may be approaching a pivotal turning point.
He highlighted three sectors, including crypto, as potential leaders in the next market rally.
Market Rotation and Crypto Set the Stage for Next Rally, Tom Lee Says
Speaking on CNBC’s Closing Bell, Lee outlined a cautiously optimistic scenario in which the S&P 500 could climb toward 7,300 as risk-off positioning eases and earnings remain strong.
“Stocks have taken some hits,” Lee said, pointing to a recent software downturn and a rotation out of the MAG 7 mega-cap tech stocks into AI-focused “bullet makers,” alongside broader risk-off moves into gold.
Despite this volatility, he emphasized that underlying fundamentals remain solid, supported by broad double-digit earnings growth across the market.
Lee identified three trades that could define the next rally:
- Rotation back into the MAG 7
- Potential bottom in the software sector (IGV), and
- Crypto assets.
According to Lee, institutional data show software ownership at multi-decade lows, while MAG 7 stocks are cheaper relative to AI leaders than at any point in the past decade.
“Crypto drawdowns have already reached about 80% of previous crypto winter levels, setting up high-probability trade opportunities,” he said.
The software sector, particularly semiconductors, remains a key variable. Nvidia’s upcoming earnings report will likely set the tone for AI infrastructure trades and could either reinforce or dampen market optimism.
Lee suggested that software might be near a bottom, but cautioned that results from major players like Nvidia will be critical to sustaining any rally.
Consumer Strength and Defensive Sectors Could Cushion Market Pivot
Consumer discretionary stocks also show signs of resilience, providing support amid tech weakness. Jonathan Krinsky of BTIG highlighted strength in restaurants, airlines, and homebuilders, noting multiple technical breakouts underway.
With consumer confidence at contrarian lows, discretionary stocks may benefit from a broadening recovery, particularly as interest rates continue to ease.
Mortgage rates have fallen from nearly 8% to 6.17%, and the 10-year Treasury yield remains favorable, fueling demand across housing and services sectors.
Lee also explained why defensive sectors, including staples and healthcare, have outperformed recently.
“This is largely mean-reversion after three years of market gains,” he said. “Portfolios are de-risking temporarily, but the underlying bull market remains intact.”
The strategist articulated that the current market environment requires careful attention to positioning, earnings, and sector rotations.
While tech and AI narratives dominate headlines, he believes broader market breadth and overlooked sectors could lead the next leg higher.
Crypto, having experienced deep drawdowns, may even preempt broader market rallies, offering traders early opportunities.
As investors await Nvidia’s report and monitor software stabilization, Lee’s view suggests the market may be poised to pivot.
If the MAG 7 resumes its uptrend, software stabilizes, and discretionary strength continues, the S&P 500 could see a measured climb toward 7,300. This could set the stage for a broader rally across equity and digital asset markets.
