Ed Yardeni

While the tech giants fight, the rest of the market (the "Impressive 493" and the Dow Jones Industrial Average) is performing extraordinarily well. The $650 billion being spent by the hyperscalers flows directly into the revenues of other companies. Building data centers requires 500 to 1,000 different vendors—including steel, concrete, wiring, and power. This acts as a massive economic stimulus, boosting GDP to ~5% and lifting the earnings of industrial and broader market companies. The Dow Jones is hitting record highs, and the economy has remained resilient despite high interest rates and inflation. A potential realization that the AI capital spending will not be profitable could eventually hurt the broader sentiment.

Yardeni observes that "Happy days are here again" and investors are buying everything, specifically highlighting Gold and Bitcoin alongside stocks. The combination of massive corporate spending (stimulus) and large government tax refund checks is creating a liquidity-rich environment. This money is flowing into alternative assets, driving prices up across the board. Both asset classes are performing "extremely well" in the current environment. Not explicitly mentioned, but generally tied to liquidity drying up or a shift in economic sentiment.

States the tech comeback "absolutely" has legs and that tech got "relatively cheap again." Cites the P/E multiple falling from ~31 to 25, even hitting 22. The significant de-rating in valuation (P/E compression) after his prior call to underweight the sector (on Dec 7) has created a more attractive entry point. The valuation reset provides a foundation for renewed outperformance in the technology sector. A broader market sell-off that leads to further multiple compression beyond recent lows.

Recommended underweighting the Magnificent 7 in early December when they traded at a 31x P/E multiple. Has now moved back to a market weight position as the multiple has fallen to 25x. The significant derating (from 31x to 25x) makes these "phenomenal growth companies" more attractive on a valuation basis within the context of his resilient earnings and economic outlook. The valuation reset presents a more favorable entry point for these core growth leaders. A recession that leads to both lower earnings (E) and a lower valuation multiple (P/E), resulting in a bear market.

Yardeni asks, "Why not go with the flow and go into Energy, Materials, Consumer Staples. Those have all done well." Given the uncertainty of how the AI trade plays out ("there's a lot we don't know"), investors should seek safety in sectors that are currently performing well and offer defensive or inflation-hedging characteristics. LONG. A recession could hurt cyclical sectors like Energy and Materials; Staples may be sensitive to rates.

Alongside underweighting US Tech, Yardeni recommended "going global instead of staying home" and the host notes his specific calls on "Korea." This is the other side of the Mag-7 rotation trade. As US tech valuations become stretched and competitive, capital flows should move to overseas markets which offer better value and are in earlier stages of their cycle. LONG. Global economic slowdown or strong US dollar headwinds.

Health care sector in emerging markets, particularly in China, has strong growth potential due to aging populations and increasing domestic demand for medical services and drugs.

He is staying with the 'go global' trade, noting that markets like South Korea and Taiwan have had V-shaped recoveries and that global equities are back in fashion, expecting continued outperformance.

Emerging markets excluding China offer lower valuations and contain growing middle classes with strong aspirations for higher living standards. These demographic and valuation dynamics provide a more favorable growth and return profile compared to the US and China. Long emerging markets ex-China as a core component of a global diversification and value-seeking strategy. Geopolitical events or a materially stronger US dollar could pressure emerging market currencies and asset prices.

Yardeni states, "If this thing gets resolved fairly rapidly, as I expect, the straits will be open and the price of oil will come down rather rapidly." He notes the Iranian Navy is "already sunk." The current oil price likely includes a "war premium" based on fears of a Strait of Hormuz closure. If the naval threat is removed and shipping normalizes, that premium evaporates immediately. SHORT oil exposure (via USO) to capture the downside mean reversion as geopolitical fear subsides. Escalation involving ground troops or hidden Iranian missile capabilities that successfully close the Strait for a prolonged period.

"We have seen this beginnings of a great rotation into foreign markets." As investors pull money from expensive US tech concentration, they are seeking value in under-owned global markets. Capital flow is shifting structurally toward international assets as part of a broader rebalancing. A strong US dollar or global recession could dampen returns in foreign equities.

Yardeni sees a healthy rotation of capital from high-flying tech stocks into the software sector as a sign of market broadening. He believes this shift is positive for the overall market because it indicates that earnings growth is becoming more widespread beyond the Magnificent Seven and semiconductors, supporting a more sustainable rally.

Earnings expectations for small-cap and mid-cap stocks have risen to record highs after being flat since 2022. This improving earnings breadth suggests these sectors will lead a broader market rally beyond just the large-cap technology names.

AI stocks corrected and are leading the market again; AI is here to stay, with big companies likely to be survivors and generate profits, potentially acquiring smaller rebranded companies.

Emerging markets have opportunities due to large and growing middle classes that drive domestic consumer demand, healthcare demand, and industrial development, moving beyond commodity dependence.