Ed Yardeni says AI sell-off is serious but not the start of a market rout

The sell-off in artificial intelligence (AI) stocks is serious but does not signal the end of the AI trade, according to Ed Yardeni, President of Ed Yardeni Research. He sees the correction as a healthy way to cool investor enthusiasm after a sharp run-up in prices.

While AI is a profitable technology in the long run, but investors are right to question the heavy spending by big tech companies. The challenge is figuring out which companies will turn those investments into profits, he noted.

“I wouldn't characterise it as a rout at this point. I think what we're doing is taking some air out of the AI bubble, which is a good thing. I don't think we want to repeat of 1999 and 2000,” Yardeni said.

He sees the AI pullback potentially benefiting emerging markets, including India, as investors look beyond technology stocks. Lower oil prices could also support India.

He remains bullish on gold despite the recent correction, though he cautioned that prices could fall further.

For US stocks, he advises caution in the near term amid the risks of a possible escalation in the US-Iran war and uncertainty around the midterm elections. Still, he expects a Santa rally towards the end of the year.

[faq type="interview" title="This is an edited transcript of the interview."][ques][/ques][ans][/ans][/faq][faq type="interview"][ques]What are your thoughts on the artificial intelligence (AI) meltdown? Is this standard profit booking or a more serious sell-off?[/ques][ans]Yes, you are absolutely right that the AI trade sell-off this time is much more serious. When you see stocks like Google and Intel taking drops of more than 25% in one day, that is very serious. Investors are starting to get weary of the AI trade. They have had AI fatigue for a while, and I think there is just a lot of confusion over whether this is going to be a profitable business. At the end of the day, AI is the real thing. I think it is a real technology. I think it will be very profitable, but it is impossible to tell which technology company is going to do well. I think the semiconductors will rebound here. The Intel news was really specific to that company because they also sell a lot of chips for the personal computer industry, and the personal computer industry is having problems getting memory chips at a price that is affordable. I think the good news is on Friday, October 30, we saw people not bailing out of the stock market, but bailing out of the AI trade and moving into healthcare, financials and industrials. As a matter of fact, nine of the 11 S&P 500 sectors were actually up last week.[/ans][/faq][faq type="interview"][ques]Energy was the other sector that was up 2%, right?[/ques][ans]Yeah, very big.[/ans][/faq][faq type="interview"][ques]Is this pullback a rout and more severe than earlier episodes?[/ques][ans]I would not characterise it as a rout at this point. I think what we are doing is taking some air out of the AI bubble, which is a good thing. I do not think we want a repeat of 1999 and 2000, and it does not look like that is happening. As the market has corrected some of the excesses and the moves to the upside in the AI stocks, the earnings expectations of analysts continue to go up. They actually get cheaper, believe it or not. The price-to-earnings (PE) ratios have actually come down a lot for the semiconductors. We are selling under the S&P 500 PE right now of 18.5. The semiconductors are selling at something like 13.5, so they have gotten much cheaper. That is usually what happens when markets expect recessions. I do not think we are going to get a recession. If not, then we are likely to see another rebound in these AI players. The overall news has actually been pretty good on cloud revenues. They have increased very significantly, and the backlog orders are very significant. I do not think this is going to be an AI bubble that bursts. I do not think it is going to cause a problem for the overall economy. I think some slowdown in the AI extravaganza is a good thing.[/ans][/faq][faq type="interview"][ques]Did you consider my use of the word rout in a more benign way, rather than a complete and crushing defeat?[/ques][ans]Yeah, I do not think it is a complete and crushing defeat. That is the short answer.[/ans][/faq][faq type="interview"][ques]Will the air being let out of the AI bubble inflate other markets, particularly India?[/ques][ans]I think so. We saw that the money did not leave the US stock market. It went into some other areas, even some expensive areas like consumer staples. The question is whether the exuberance about AI might benefit the emerging stock markets, particularly India. I think the answer is it should. India has a lot of technology smarts for sure. Maybe it is not as heavily committed to AI, but it has technology resources. Of course, some resolution of the West Asia conflict that leads to lower oil prices would be a big positive for India.[/ans][/faq][faq type="interview"][ques]What is your view on the recent correction in gold?[/ques][ans]I turned bullish in 2023 when it rose to a new high above $2000 per ounce, and I stayed bullish until it got to 5,500. Then I forgot to turn bearish because it has not been pleasant since then, and none of the support levels have held. It should have held 4000, but it breached that. On the chart, it looks like it could go down still lower, something in the neighborhood of maybe 3,750 to 3,900. But I still think that it is a bull market. I think it has been more of a correction than a bear market in gold. If that is the case, I think you will see that the foreign central bank buying, particularly by China, will become more and more of a bullish factor. I think right now it is the increase in interest rates that has pushed gold down, but it has been a frustrating asset to try to invest in.[/ans][/faq][faq type="interview"][ques]Markets generally do well post-midterm elections, but is there a specter that the war between the US and Iran intensifies after the midterms? What are your thoughts on the potential for escalation?[/ques][ans]Yeah. We have been advising proceeding with caution in the US stock market since September 15. That is when we pointed out that the war is not over. Midterm elections are coming, and the President made it clear that he intended to re-escalate the war after the midterms. Of course, this could all be bluster. It could all be attempts to get a diplomatic solution. There have even been some reports in the past few days that maybe something could happen on the diplomatic front, but I am kind of skeptical. I think it might be a good idea just to hold back if you have any cash. There will be buying opportunities resulting from the midterm elections and resulting from any re-escalation of the war. Then the AI trade has to become a little less volatile. I think on a near-term basis, we are not out of the woods yet, but I think there will be a year-end rally in the US. We typically call it a Santa rally. Santa Claus shows up typically somewhere between Thanksgiving and the end of the year. I think that will happen again.[/ans][/faq][faq type="interview"][ques]When do we get the midterm election results?[/ques][ans]Basically a day after. I will be staying up late, and the television networks start to predict results. Sometimes results are not available for a while. I think right now, the real contrarian view is that the Republicans will hold on to the House and hold on to the Senate. But all the polls are saying that is probably not going to happen, and that the Republicans will at least lose the House. I think when we come out of this thing, the country will be more divided, not less divided, and more partisan. I think for the stock market, the issue will be whether that means the next time we have a debt crisis or a government shutdown crisis, they will not be able to come to an agreement and it will last a lot longer. That may very well be an issue going into 2027. The market is not looking forward to the elections, but who knows? Sometimes these things surprise. One theory is that Democrats like to talk to pollsters and Republicans do not, but we will find out.[/ans][/faq]

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