Transcript:

Caroline WoodsMy next guest is dialing back his expectations for Big Tech heading into 2026. Ed Yardeni is President of Yardeni Research. He joins me now. Ed, thanks so much for being here.

Ed YardeniThank you.

Caroline WoodsSo add underweight tech heading into the new year overweighting the rest of the market. Talk to us about how that actually plays out. Can this market move higher without big tech leading the way?

Ed YardeniWell I’m specifically focusing on underweight in The Magnificent Seven. Those are clearly the biggest tech. And the idea is that artificial intelligence is creating actually a lot of competition among the Magnificent Seven. I’ve been using that the Game of Thrones analogy, for quite some time. The very definition seven kind of, rule their own fiefdoms, they prospered, focusing on, their specific, specific businesses they were good at.

And they had big moats around them. But as a result of AI, they’re spending like, crazy and, and increasing capacity. And in their networks, they are spending like, crazy and, getting the top employees they can and AI and that’s going to start, cutting into their profit margins. So I would say, it’s time to, cut them back a bit.

They’re about 30% of the market cap of the S&P 500. So there’s certainly room to reduce their your exposure in that area. And I would just continue to overweight maybe put more in financials industrials and a sector that I haven’t been talking much about health care I think could do very well in 2026.

Caroline WoodsWhat about sticking with tech for just a second under waiting the mag seven. What about the rest of the sector? Are there other areas within tech that you would still be bullish on?

Ed YardeniWell, I think semiconductors generally speaking. All right. But they’re two they’ve had a huge run. Their multiples are very high. And we are seeing more and more comp competition. I think, in the communication services area, it’s basically meta. And Netflix, I think those, two stocks still can perform well. And so I would say that, the, the, the combination of information technology and communication services, those two sectors alone, account for 45% of the S&P 500.

And, I’ve been for quite some time saying overweight the two. But I find myself saying, how can you overweight something that’s already 45% of the S&P 500, unless you think it’s just going to kind of be the blob and swallow up the entire S&P 500. And I don’t think that’s the case. I think, the more opportunities in what I call the impressive 493, which is everything but the Magnificent Seven and the impressive 493 are the, the customers of the Magnificent Seven.

They’re the ones that are using these technologies to boost their productivity, their profit margins and their profits.

Caroline WoodsSo if you had to describe your market view for the new year in one word, what would it be?

Ed YardeniBullish.

Caroline WoodsHow bullish? How much higher can the market go in 2026.

Ed YardeniWell you know we’ve had three years now of double digit gains. In the high teens and low 20s, and a year over year percent change. That’s quite remarkable. It’s unusual to have a fourth year, but I think we are going to have a fourth year of double digit gains with a gain of, 10%.

So I’ve got the market going from about where it is now, which is pretty close to 7000, up to 7700 by the end of the year. But then, I’ve had a, get more bullish kind of, overlay on my outlook. And I’ve called it the roaring 2020s. I think by the end of the decade, that is, by the end of 2029, I think the S&P 500 could be at 10,000, and that would be based on the market anticipating $500 a share, for the S&P 500 in 2030, with a multiple of of 20, that gives you 10,000.

Caroline WoodsSo you talked about the sector leadership that could get this market higher. But fundamentally speaking, what moves this market another 10% higher?

Ed YardeniWell, this has been a very much an earnings led, bull market. That’s that’s the good news. And I know the valuation is very high, but the valuation has been very volatile. And it’s been this high before. I’m talking about in recent history, right after the lockdowns were lifted back in 2020, the pandemic lockdowns, the market had a remarkable recovery.

And it was evaluation led to recovery that got it up to a 22 forward PE, which is basically where we are right now. And over this period the market’s up. The S&P 500 is up 100%. As a result, of earnings being up 100%. So it’s been a very strong earnings environment because the economy has been remarkably resilient.

It’s withstood all sorts of shocks, since the pandemic. And that’s been reflected in earnings. So I have earnings, going up from about $265 a share this year, to $310 a share next year. And that’s not, out there. It’s actually in line with the consensus of industry analysts. Right now, they’re optimistic as well.

Caroline WoodsThe economy, you say, has been remarkably resilient. Yeah. We have seen some signs of weakness in the labor market. How big of a threat is that in the new year?

Ed YardeniYeah. Well, it’s a it’s a strange year development because, over the past year we have had especially in the second and third quarters, very strong real GDP, real GDP was almost 4% in the second quarter. It looks like it’s tracking at about 3.5% in the third quarter. And yet at the same time, the, labor market indicators of weakened, particularly payroll employment that could only, be caused by productivity being remarkably strong.

And there’s really nothing wrong with more of our growth coming from productivity. However, there are structural problems in the labor market that I don’t think, the fed can really fix by lowering interest rates. We’ve got very restricted immigration. We’ve got deportation. We’ve got, companies holding off on hiring until they figure out the extent to which I can increase the productivity of the people that have working for them.

Now, young people coming out of colleges, there’s a skills mismatch. The, the degrees they have just don’t really match this skill sets that employers need. So that’s going to take some time to sort out. So, you know, the bad news isn’t the labor market for sure for new entrants coming out of school, for high schoolers looking for a job, but, for, just about everybody else, the, the unemployment rate remains very, very low for, adult, for adults in their 30s and, and older.

The baby boomers are staying at work longer, but they’re also retiring. And that’s another reason why we’re seeing some slow slowing down in the labor force. Because the baby boomers are retiring with a lot of skills. It certainly hard to find young people, they can, substitute for them. Hence, we really need the productivity to bring the young people into the labor market.

Caroline WoodsSo what is the biggest risk to the stock market in 2026?

Ed YardeniWell, I think that, usually in the past, when something, kind of came out of nowhere, it usually came out of the credit markets. It turns out that even in the professionals with the credit markets sometimes don’t realize what sort of Frankenstein monster they’ve created. We certainly saw that in 2007, 2008, with all the, the credit derivatives, and then in the past, we’ve had situations where financial institutions, just assumed that everything would be just great, for the foreseeable future and didn’t anticipate that interest rates would go up and some, some credit.

Some of their loans blew up. And right now we have that, development in the private, credit markets. There’s a lot of concern that, things could blow up in the private credit market. So I’m watching out for those kind of, issues. People have also been worrying about a debt crisis. Government debt crisis.

I think we’re seeing some of that overseas. I don’t really expect that to be a problem. In 2026, this time around. So, so, you know, it’s it’s a problem that hangs over our heads, but I don’t think it’s going to show up in 2026.

Caroline WoodsOkay, so just to wrap things up, what’s your best investment advice as we head into the new year?

Ed YardeniWell, with the benefit of hindsight, if you’re a long term investor, one of the best performing, stock price index indexes has been the Nasdaq 100. And there’s an ETF in that called q, q, q. It’s over the past ten years, it’s averaged the 20% gain. So I would say any, opportunity to, hop on board that, that train is, is a good one.

Caroline WoodsSo wait a minute. And underweight the Mag seven. But you’re bullish on the Nasdaq 100. Just explain that a bit more.

Ed YardeniYeah it’s short term versus long term thinking. I’m thinking in the short term here we’re going to have more opportunities to buy the mag seven at at lower valuation levels. And that doesn’t necessarily mean that they go down. It just could be that they don’t go up as much in earnings kind of catch up with, the high valuations.

And so I think, on a short term basis, you probably want to just stick with the S&P 500 and because it’s going to broaden out the 493. But along the way, if we get some good opportunities to buy, The Magnificent Seven cheaper, I think you go for something like the Nasdaq 100, so that Nasdaq would 100 would be sort of my, you know, 10 to 20 year, investment and the S&P 500 would be the 2026.

Caroline WoodsOkay. We’ll leave it there. Ed Yardeni, thank you so much. I always appreciate your insights.