Wall Street's leading optimist urged investors not to rush into buying AI stocks. What does he suggest?

Ed Yardeni, president of Yardeni Research, predicted at the beginning of the year that the S&P 500 would reach 7,700 points by the end of December; in May, he raised his forecast to 8,250, and in August, to 8,400. His forecast is the most optimistic on Wall Street. But even that level isn’t bold enough, according to Yardeni.

However, for investors who missed out on this year’s market rally and are now considering whether to buy shares in AI companies, Yarden advises them not to rush. There are still opportunities in the market: corporate earnings forecasts are rising, while the relative value of stocks is falling, he noted in an interview with MarketWatch.

Yardeni considers the current rally to be fundamentally different from the “dot-com” boom of the early 2000s. Back then, the market was driven by FOMO (fear of missing out): By early 2000, the forward P/E ratio (price-to-earnings ratio) for S&P 500 stocks had reached a record high of 25, while in the information technology sector it had soared to 55.

Now the situation is reversed. The market P/E ratio is around 20, while that of semiconductor manufacturers is around 17. “As analysts raised their earnings forecasts, the P/E ratio declined,” says Yarden. Investors are nowhere near ready to pay as much as they did during the 1999 bubble, he notes.

Now, according to Yarden, FEMO (fabulous earnings momentum) is in effect. The current rally is driven by earnings growth, whereas the one that ended with the dot-com crash was fueled by rising valuations. Therefore, Yarden believes today’s market is more sustainable.

This does not apply to individual stocks of AI companies. “I wouldn’t rush to invest in AI right now,” says Yarden. “Everyone’s tired of artificial intelligence, and it’s too hard to figure out who will win, who will lose, and who might even go under.” For those who still want to invest in the AI sector, Yarden advises the QQQ exchange-traded fund, which tracks the Nasdaq-100, rather than individual stocks. Both the future beneficiaries of the AI boom and its laggards are likely already included in the Nasdaq-100, so the success of the former will generally offset the losses of the latter, he noted.

The second piece of advice is to invest not in artificial intelligence developers, but in industries that benefit from its application. Yarden identifies four such sectors. For all four, his recommendation is to hold a higher weighting in the portfolio than their weight in the index (overweight).

According to him, the finance and healthcare sectors can use AI to increase revenue and reduce costs. The manufacturing sector will benefit from the expansion of AI infrastructure by cloud giants. Yarden identified energy as the fourth sector with a higher weighting in the portfolio.

For a long time, Yarden also recommended holding information technology and telecommunications stocks at a higher weighting than their index weighting. Toward the end of last year, he changed his recommendation: now their weighting in the portfolio should match their index weighting.

His year-end forecast for the S&P 500 remains unchanged at 8,400 points. “I try not to change it too often,” Yarden explained.

This article was AI-translated and verified by a human editor