"Bull market" Ed Yardeni: Don't chase AI stocks now, there's AI fatigue.

One of the most optimistic voices on Wall Street is putting the brakes on AI trading.

Ed Yardeni, president of Yardeni Research, explicitly warned that now is not the time to chase AI stocks. He believes the market is experiencing "AI fatigue," and the outcome is uncertain. He advises investors to shift their focus to the financial, healthcare, and industrial sectors that benefit from AI applications, rather than betting on AI technology companies themselves.

In an interview with MarketWatch this Thursday, Yardeni stated, "I wouldn't jump into AI trading right now. Everyone experiences AI fatigue, and it's difficult to predict who will win, who will lose, or who might get wiped out. If you want exposure to this, hold a diversified fund like QQQ, rather than picking individual stocks. " This statement from a strategist who has consistently led the bullish camp this year is particularly noteworthy. Dubbed "Wall Street's most optimistic person" by the media, Yardeni has raised his year-end target for the S&P 500 three times this year, with his latest target at 8400 points, and maintains his bullish outlook for the "roaring 2020s" will continue.

Yardeni believes this bull market is driven by earnings rather than a valuation bubble, making it fundamentally more stable and fundamentally different from the dot-com bubble of 2000. He subjectively estimates an 80% probability that the "Roaring 2020s" will continue and predicts that the US will not fall into recession.

This bull market is driven by earnings, not by valuation bubbles.

Yardeni attributes the core difference between the current market and the dot-com bubble era to the different driving logic. He coined a new term, "FEMO" (fabulous earnings momentum), to contrast with the "FOMO" (fear of missing out) that dominated the market around 2000.

He pointed out that at the peak of the dot-com bubble, the S&P 500's forward price-to-earnings ratio was as high as 25, with the information technology sector even soaring to about 55. In the current cycle, however, as analysts continue to raise earnings forecasts, valuation multiples are actually declining. The semiconductor sector currently has a price-to-earnings ratio of about 17, and the overall market is about 20; "investors are simply unwilling to pay the multiple levels seen during the 1999 bubble."

Yardeni acknowledges that the current "irrational exuberance" is reflected in analysts' earnings expectations rather than valuations. However, he believes these expectations are supported by actual performance—first and second quarter earnings reports were extremely strong, leading analysts to raise their 2027 earnings forecasts. He has raised his S&P 500 target three times this year, from 7700 points at the beginning of the year, through 8250 points in May, and now to 8400 points, each adjustment corresponding to a strong earnings season.

The outcome of the AI sector is uncertain; a diversified portfolio is recommended.

Despite his optimistic outlook on the overall market, Yardeni's specific advice on AI-themed investments is rather conservative. He explicitly stated that he does not recommend chasing AI stocks at this time, arguing that the market is already experiencing "AI fatigue" and that identifying winners and losers in the AI sector is extremely difficult.

His alternative is to hold the Nasdaq 100 index fund QQQ. His logic is that both winners and losers are likely to be within the Nasdaq 100 index, and holding an index fund means that the winners' gains are likely to cover the losers' losses.

In terms of sector allocation, he prefers to bet on beneficiaries of AI applications rather than AI technology providers. He is particularly bullish on the financial and healthcare sectors, believing they have significant potential to leverage AI to boost revenue and reduce costs; the industrial sector will benefit from capital expenditure commitments by hyperscalers to expand their AI infrastructure; and the energy sector is his fourth overweight option. The information technology and communications services sector, which had been overweighted for a long time, was reclassified to its market standard weight at the end of last year.

Government debt pressure and bond market signals: Not yet constituting systemic risk

Yardeni remained relatively calm about concerns about the high level of U.S. federal debt and the expanding deficit. He stated that the debt problem has been on his "list of concerns" for over 45 years—in fact, he coined the term "bond vigilantes" himself in July 1983, when the federal deficit was only $250 billion, but has now reached $1.5 trillion to $2 trillion.

He disagreed with the assessment that "interest rates will remain high for a long time," believing that an interest rate level of 4% to 5% is within the normal range. "I will only worry when bond vigilantes really start to worry about a debt crisis," he said, noting that bond vigilantes are already quite active in Japan and the UK, and have also begun to take action in the US.

Regarding interest rate trends, Yardeni believes that the Federal Reserve has raised the federal funds rate from near zero to 5.5%, and the economy remains resilient, which to some extent confirms his confidence in the fundamentals of the US economy. He also cautions that a bear market does not necessarily require a recession – as seen in 2022.

Gold and Global Allocation: A Quiet Shift in Strategy

Regarding asset allocation, Yardeni's stance has undergone several adjustments. On the allocation between global and US equities, he had long advised "staying in the home market" since 2010, only shifting to "going global" at the end of last year, partly because the US stock market capitalization already accounts for 65% of the total global stock market capitalization, leaving limited room for further overweighting. He stated that this shift has yielded positive results this year.

He offered conditional support for gold. He frankly admitted that he is not a gold believer and is also confused about the valuation methods for this type of asset without coupons or dividends. However, the US freezing its international reserves following the Russia-Ukraine conflict prompted foreign central banks to increase their gold holdings and reduce their dollar reserves, leading him to re-evaluate the allocation value of gold. Yardeni lowered his year-end target price for gold from $5,500 to $5,000, and believes that holding a certain proportion of gold is reasonable in the current environment.

"The Roaring 2020s": Three more years to go before it ends

Yardeni first proposed the "Roaring 2020s" theory in August 2020, a prediction widely considered unrealistic at the time. Now, he's extending his focus to the final stages of this cycle and will soon deliver a keynote address at the MoneyShow titled "Will the Roaring 2020s Continue into the 2030s?"

His answer was not optimistic. "The problem with the 2030s is that it rhymes with the 1930s, a terrible period of frequent geopolitical crises," he said.

When asked if his consistently accurate predictions made him nervous, Yardeni admitted "a little," adding that he has a contrarian streak. He also criticized the "permanent bear" view, arguing that it leads investors to exit the market at the top, middle, and bottom, "You'll never truly be in the market."

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