AI's impact on software stock prices is overdone, says Yardeni Research's Ed Yardeni
Speakers
Ed Yardeni — President of Yardeni Research
— Yardeni Research president
Deirdre Bosa — Host
— CNBC anchor, tech reporter
Summary
- Ed Yardeni characterizes the current market sentiment as "AI Derangement Syndrome," moving from euphoria to fatigue and now to fear, specifically regarding job losses and software disruption.
- He reiterates a call made on December 7th to underweight the "Magnificent Seven" due to rising competition and capital expenditure concerns, favoring a rotation into global markets and value sectors.
- While acknowledging the software sell-off is historically severe (worst since the financial crisis), he advises against buying broad software ETFs, arguing that the sector will bifurcate into winners and losers.
- He identifies Financials as a contrarian opportunity, arguing that large banks (citing JPMorgan) will harness AI for productivity rather than be displaced by it.
Trade Ideas
Yardeni says the software decline is "overdone to a certain extent" but explicitly warns: "I don't know that you buy an ETF of software stocks because some are not going to make it." While the macro sell-off provides value, the AI disruption is real enough that it will kill some companies while boosting others. Buying the index (ETF) exposes you to the losers; you must be a stock picker here. NEUTRAL (Avoid ETFs, Selective Longs). Picking the wrong "winners" in a rapidly disrupting environment.
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.
He notes Financials have been "beaten down of late because of the AI fears" but cites Jamie Dimon (JPM) expecting to spend $20 billion on tech/AI. The market fears AI will disrupt banks, but Yardeni argues AI is a tool that large incumbents will use to become "more productive." Therefore, the sell-off is an opportunity to buy the beneficiaries of AI adoption in the financial sector. LONG. Regulatory hurdles or slower-than-expected AI integration in legacy banking systems.
Ed Yardeni
President, Yardeni Research
Yardeni explicitly states his firm decided to "rebalance our recommendation" on December 7th to "underweighting the Magnificent Seven." He cites "too much competition as a result of all the money they were spending on data centers" as the driver for this underweight rating. The trade is to rotate out of these crowded, high-capex names. AVOID / UNDERWEIGHT. AI capex could yield faster-than-expected monetization, reigniting the rally.
