Update On Earnings & Review of The Great Rotation Of The Roaring 2020s

Episode Overview

• The Shift to "AI Immunity": Investors are moving from greed to fear regarding Artificial Intelligence, seeking companies that are "immune" to disruption rather than just betting on those building the technology.
• The "Great Rotation" Away from Big Tech: The narrative tracks a massive divergence between the "Magnificent 7" mega-cap stocks and the rest of the market (the "493"), with capital flowing rapidly into broader sectors like industrials and financials.
• Global Opportunities Beyond the US: The episode presents a strong case for international diversification, noting all-time high earnings estimates in Emerging Markets and developed nations excluding the US.
• Rethinking Economic Metrics: The discussion challenges traditional definitions of productivity and capital expenditure, contrasting the over-spending in AI infrastructure with the under-spending in the energy sector.

Key Concepts

• The "AI Immunity Trade" Psychology Market sentiment has shifted from viewing AI solely as a profit generator to fearing it as a disruptor. Investors are now "nervous," worrying about AI undercutting business models (like software or logistics) and displacing labor. This has created a demand for stocks perceived as "immune" to AI's deflationary pressures.

• Magnificent 7 vs. The "493" A major rotation is occurring where investors are exiting concentrated positions in mega-cap tech stocks (Mag 7) and moving into the remaining 493 companies of the S&P 500. This "flash mob" effect suggests a broadening, healthier market rally, evidenced by the S&P 400 (Midcap) and S&P 600 (Smallcap) hitting new highs even as tech stalls.

• The "DeepSeek" Catalyst The release of the Chinese AI model "DeepSeek" acted as a shock to the system. It raised fears that efficient, low-cost AI could commoditize the expensive proprietary models US tech giants are building, potentially destroying their profit margins and questioning the ROI of their massive infrastructure spending.

• The Capex Paradox (AI vs. Energy) Two sectors are behaving inversely. Tech companies are in a "build it and they will come" phase, aggressively over-spending on data centers to secure future capacity. Conversely, traditional energy companies have historically under-spent due to ESG pressures. Energy stocks are rallying based on scarcity and supply constraints, while tech rallies on future innovation hopes.

• Nuance in Emerging Markets (EM) "Emerging Markets" is not a monolith. The data shows that strength in EM is driven largely by specific semiconductor leaders in Taiwan and South Korea (like TSMC and Samsung) and commodity exporters. This contrasts with China, which remains a drag on earnings averages, meaning "investing in EM" is often just a proxy for investing in the global chip cycle.

Quotes

• At 3:03 - "It's become kind of the AI immunity trade, everybody's kind of been running for the hills here trying to figure out what is least likely to be disrupted negatively by AI." - Yardeni explains the shift in investor psychology from greed (AI profit potential) to fear (AI disruption).
• At 7:01 - "Maybe it's time to underweight the Magnificent 7 because they were in fact spending an enormous amount of money on AI infrastructure without really any certainty about what the payoff would be." - Rationale for rotating out of mega-cap tech, citing high capital expenditures with unproven returns.
• At 14:04 - "Even though there are a lot more losers or companies that don't have profits in the Russell 2000... they've both had the same configurations for overall forward earnings." - Comparing the small-cap Russell 2000 with the S&P 600, noting that despite quality differences, their earnings trajectories are similar.
• At 18:43 - "It's really fascinating how just like somebody flipped a switch and everybody rotated... out of the Magnificent Seven... and to everything else. It was kind of like a flash party." - Illustrating the speed and synchronized nature of sector rotation towards the broader market.
• At 30:05 - "Musk has been talking about automated plants with robots run with AI 24/7. So how do you measure productivity in that world? I mean if you got one person just checking that everything is going okay on an iPad... is all the output attributable to one person?" - Challenging fundamental economic formulas used to measure health and growth in an automated future.
• At 35:00 - "I've shown you a chart before showing the inverse relationship between gold and the S&P 500... Long term, they have the same trend. So if we get to 10,000 on the S&P 500 by the end of the decade, I think we'll get to 10,000 gold by the end of the decade." - Suggesting gold is not just a hedge but a long-term asset that inflates alongside equities.

Takeaways

• Diversify into the "Smidcaps" and Global Markets: Actionable value is currently found outside the US tech giants. Look toward US Small and Mid-cap stocks, as well as developed international markets, to capture the "broadening" of the rally.
• Evaluate Energy Stocks for Scarcity Value: Consider energy positions not as growth plays, but as beneficiaries of under-investment. The lack of new infrastructure combined with geopolitical tension creates a floor for prices that isn't dependent on technological breakthroughs.
• Treat "Emerging Markets" as a Semiconductor Play: When allocating to Emerging Markets, recognize that you are primarily buying exposure to the hardware cycle (Taiwan/Korea). Adjust your portfolio based on your view of the chip industry rather than general developing economic growth.
• Hold Gold as a Long-Term Growth Asset: Do not view gold solely as a "doomsday" hedge. The historical data suggests it can be held alongside equities for long-term appreciation, potentially matching the S&P 500's growth trajectory over the coming decade.