One longtime tech bull is waving a white flag of sorts.
Ed Yardeni, president of Yardeni Research, has been overweight the tech sector for 15 years and often has one of the highest S&P 500 (^GSPC +0.67%) targets on Wall Street. However, Yardeni is now reversing his position, going underweight on the "Magnificent Seven" stocks, and instead encouraging investors to buy the remaining 493 stocks on the broad-market index, which he dubbed the "Impressive 493."
Image source: Getty Images.
Why Yardeni sees a shift
Yardeni's primary reason for ending his buy call on the tech sector is market concentration. On CNBC, Yardeni said that the "Magnificent Seven" now makes up 45% of the market cap of the S&P 500, which he believes is unsustainable. He also argued that in order for those companies to continue to be successful, the "Impressive 493" will have to start buying their products and using them, thereby also taking part in the AI boom.
He sees the emerging winners as companies that don't necessarily have to create AI products, but can use them to become more efficient and increase productivity. In particular, he was bullish on financials, industrials, and healthcare, and gave an example of a technology that's made it easier for healthcare companies to share medical records. He also argued that all companies are becoming tech companies.
NYSEMKT: MAGS
Key Data Points
Is the "Magnificent Seven" overvalued?
The Roundhill Magnificent Seven ETF (MAGS +0.30%) is up 21% this year, outperforming the S&P 500 again this year, though its outperformance gap has narrowed.
Asked if the "Magnificent Seven" was overvalued, Yardeni replied "somewhat." Indeed, the elite group of tech stocks does trade at a premium to the S&P 500, but the only one in the group with a sky-high valuation is Tesla, with a price-to-earnings ratio of 300. Most of the sector has delivered strong results to earn a premium valuation.
Is Yardeni right?
Yardeni's call is notable because while it's a negative take on the tech sector, he doesn't see an AI bubble. In fact, he seems to see the opposite effect, arguing that AI is strong enough that the productivity gains from it will spread to the parts of the market it hasn't lifted up yet.
The argument he's making doesn't have to be an either/or proposition. Both the "Magnificent Seven" and the "Impressive 493" can be winners on the stock market, much like they were this year.
Eventually, the market concentration in the S&P 500 should revert closer to its historical mean, but for now, both the Mag 7 and the rest of the S&P 500 look poised to benefit from AI tailwinds.
