One of Wall Street's most optimistic voices is now applying the brakes to the AI trade. Yardeni Research President Ed Yardeni has issued a clear warning: now is not the time to jump into AI stocks. He believes the market is experiencing "AI fatigue" and it is difficult to predict the winners, which leads him to suggest investors pivot toward financial, healthcare, and industrial sectors that benefit from AI applications, rather than betting on AI tech companies themselves.
In an interview on Thursday, Yardeni stated he would not enter the AI trade at this moment, citing widespread "AI fatigue" and the difficulty in determining who will win, lose, or face a margin call. For investors seeking exposure, he recommends holding a diversified fund like the Nasdaq-100 tracker QQQ instead of picking individual stocks. This stance is particularly noteworthy coming from a strategist who has consistently led the bull camp this year. Known as one of the most optimistic voices on Wall Street, Yardeni has raised his year-end S&P 500 target three times, with the latest at 8400 points, and maintains his "Roaring 2020s" bull market thesis.
Bull Market Driven by Earnings, Not Valuation Bubbles
Yardeni believes this bull market is fundamentally more robust because it is fueled by earnings rather than valuation expansion, marking a key distinction from the 2000 dot-com bubble. He sets the subjective probability of the "Roaring 2020s" continuing at 80% and does not foresee a US recession. He has coined the term "FEMO" (fabulous earnings momentum) to contrast with the "FOMO" (fear of missing out) that dominated around the year 2000.
He points out that at the peak of the dot-com bubble, the S&P 500 traded at 25 times forward earnings, with the tech sector soaring to roughly 55 times. In the current cycle, however, valuation multiples are contracting as analysts raise earnings forecasts. The semiconductor sector trades at a price-to-earnings ratio of about 17, with the broader market near 20, indicating investors are unwilling to pay the multiples seen during the 1999 bubble era. Yardeni acknowledges that current "irrational exuberance" is visible in analyst earnings expectations rather than valuations, but he contends these expectations are backed by solid results. First and second-quarter earnings reports have been exceptionally strong, prompting analysts to lift 2027 projections. His three S&P 500 target hikes this year, from 7700 at the start, to 8250 in May, and now 8400, have each corresponded to robust earnings seasons.
AI Winners and Losers Hard to Distinguish, Diversified Funds Suggested
While optimistic on the broader market, Yardeni’s specific advice on AI-themed investments is cautious. He explicitly advises against chasing AI individual stocks now, citing "AI fatigue" and the high difficulty of identifying winners among the contenders. His alternative is holding the QQQ ETF, reasoning that winners and losers likely both reside within the Nasdaq-100, so holding the index ensures gains from winners can likely cover losses from losers. In terms of sector allocation, he prefers betting on beneficiaries of AI applications rather than the technology providers themselves. He is clearly bullish on the financial and healthcare sectors, seeing vast potential for these industries to use AI to boost revenue and cut costs. He also favors the industrial sector, benefiting from hyperscalers' capital expenditure commitments to expand AI infrastructure, and lists energy as a fourth overweight option. Notably, he had previously over-weighted technology and communication services but rebalanced them to market weight at the end of last year.
Treasury Pressures and Bond Market Signals: Not a Systemic Risk Yet
Yardeni remains relatively unconcerned about high US federal debt and deficit expansion. He notes that debt has been on his "worry list" for over 45 years. In fact, he coined the term "bond vigilantes" in July 1983, when the federal deficit was $250 billion, compared to the current $1.5 trillion to $2 trillion. He disputes the "higher-for-longer" interest rate thesis, considering the 4% to 5% range as normal. "I will worry when the bond vigilantes truly begin to fret about a debt crisis," he said, noting they are currently more active in Japan and the UK, with some emerging activity in the US. On rate trajectory, he points to the Fed's hike from near zero to 5.5% and the economy's resilience as validation of his confidence. He also cautions that bear markets do not necessarily require a recession to trigger, as evidenced in 2022.
Gold and Global Allocation: A Quiet Strategic Shift
Yardeni's asset allocation stance has seen several adjustments. Regarding global versus US equities, he long advised "stay at home" since 2010, but shifted to recommending "go global" late last year. This change is partly because the US stock market now accounts for 65% of global market capitalization, leaving limited room for further overweighting. He notes this shift has already paid off this year. For gold, he offers conditional support. Admitting he is not a gold bug and is unsure how to value an asset with no yield or dividend, he acknowledges that the freezing of Russian reserves after the Ukraine conflict has prompted foreign central banks to increase gold holdings and reduce dollar reserves, leading him to reconsider gold's role. Yardeni has trimmed his year-end gold target to $5000 from $5500, suggesting a reasonable allocation to gold in the current environment.
Roaring 2020s: A Three-Year Finale
Yardeni first proposed the "Roaring 2020s" thesis in August 2020, when it was widely seen as unrealistic. He now extends his view to the cycle's conclusion and is set to deliver a keynote at an upcoming event titled "Will the Roaring 2020s Extend into the 2030s?" His answer is not optimistic. "The problem with the 2030s is that it rhymes with the 1930s, which was a terrible period of geopolitical crises," he said. When asked if his consistently accurate predictions make him nervous, Yardeni admits "a little," citing a contrarian streak in his nature. He also criticizes "perma-bears," arguing that such views push investors out of the market at peaks, in the middle, and at troughs, meaning "you are never really in the market."
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