After being long big tech in the broader benchmark S&P 500 index for the past 15 years, Ed Yardeni of Yardeni Research is now shifting his stance on the group, which includes the "Magnificent Seven" stocks, to a more neutral position. Instead, Yardeni is more bullish on the rest of the S&P 500, which he has labeled the "Impressive 493."
The Magnificent Seven account for nearly 35% of the market-weighted S&P 500's valuation, so it has been a strong run for the group over the past few years, as well as an impressive run for tech in general.
Yardeni is not alone in questioning the valuations of tech stocks, particularly those fueled by artificial intelligence (AI) hype. While it's clear that AI will have a profound impact on society, it's less clear whether all the AI infrastructure investments being made by the Magnificent Seven and others will yield the returns that investors are looking for.
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Yardeni also sees a shifting landscape among the Magnificent Seven, as they transition from loose friendships to more direct adversaries, as well as new competition emerging from smaller, scrappier tech companies and start-ups. In an interview with CNBC's Squawk Box earlier this month, Yardini said:
It's been 15 years for me, the same thing with overweighting the U.S. I've been talking about that since 2010, and it's worked out, and at some point you've got to look and say, 'How concentrated are these markets going to be? Is the Magnificent Seven going to take everybody else out? Is there going to be no market cap left for anyone else?' I highly doubt that.
Shifting to the broader market
While all of this competition from one another and new companies may start to erode some of the Magnificent Seven's power and margins, Yardeni thinks it will actually benefit the Impressive 493, which will start to leverage and lean on technology more than they have historically.
"I'm kind of betting ... that all companies are becoming technology companies," Yardeni told CNBC in early December. "You either make it, or you use it, and I think more and more companies are using technology to increase productivity."
Yardeni is recommending the industrials, financials, and healthcare sectors. Healthcare, in particular, is a new recommendation from the firm, largely because it has been left for dead but is actually the biggest contributor to economic growth, especially as the baby boomers age and rely more on the healthcare system.
I would agree with Yardeni's take here. Investors should strive to create the best risk-reward scenario possible, and the best way to do this is by seeking out great companies trading at reasonable valuations, which are more readily available in sectors such as healthcare, financials, and industrials. Many AI companies are great, or even fantastic, but more analysis and proof are needed to justify their current valuations.
