Yardeni Research President and veteran Wall Street strategist Ed Yardeni said on Monday that the recent selloff in artificial intelligence (AI) related stocks does not signal a broad market crash, but rather helps cool down what had been an overheated AI investment frenzy. He believes AI technology carries genuine commercial value and is poised to generate substantial profits in the future, and that the recent pullback may offer investors an opportunity to build positions in semiconductor stocks.
In an interview, Yardeni said the recent tech stock correction is "letting some air out of the AI bubble," which is a positive signal for healthy market development. Although it remains difficult to determine which tech companies will ultimately capture the greatest gains from AI development, he trusts that AI technology itself will continue to advance and gradually achieve commercial profitability.
Yardeni noted that as share prices have pulled back recently, valuations of AI-related stocks have declined, yet Wall Street analysts continue to raise their earnings expectations for the companies involved, meaning the investment appeal of certain stocks is strengthening. He is particularly bullish on the rebound prospects for the semiconductor sector.
Data shows that semiconductor stocks currently trade at a forward price-to-earnings ratio of about 13.5 times, below the S&P 500's 18.5 times. At the same time, continued revenue growth in cloud computing businesses, the large backlog of orders accumulated by enterprises, and demand for AI infrastructure buildout all provide support for the semiconductor industry's future growth.
According to a Yardeni Research report, analysts expect semiconductor industry earnings to grow 114.3% in 2026 and a further 77.9% in 2027, indicating the market remains optimistic about the sector's earnings growth over the next two years. In addition, the combined remaining performance obligations of Microsoft (MSFT.US), Oracle (ORCL.US), Amazon (AMZN.US), and Google parent Alphabet (GOOGL.US) have reached $2.5 trillion. This metric mainly reflects the scale of business for which contracts have been signed but revenue has not yet been recognized, meaning large tech companies still have substantial contracted revenue awaiting realization in the future.
However, Yardeni Research also pointed out that how to raise sufficient funding for AI infrastructure buildout and complete related projects on schedule will be the main challenge for tech companies in converting these contracts into actual revenue.
In the memory chip segment, the firm believes that driven by strong AI demand, major memory chip manufacturers' capacity orders have been booked through 2029, giving these companies stronger pricing power over their products.
Yardeni's remarks came just after the U.S. semiconductor sector experienced a fierce round of selling. Last Friday, Intel (INTC.US) shares plunged 28.6%, SanDisk (SNDK.US) fell 13.5%, and Advanced Micro Devices (AMD.US) dropped 10.9%. However, Yardeni believes this correction does not mean investors are broadly retreating from U.S. equities, but rather that market capital is beginning to rotate away from previously high-flying AI-related stocks toward other sectors such as healthcare, financials, and industrials.
As for the overall U.S. stock market trajectory, Yardeni still expects a year-end rally but reminds investors to watch for short-term volatility that could stem from the U.S. midterm elections and geopolitical developments. He said the U.S. midterm elections on Tuesday, as well as a possible re-escalation of war involving Iran, could both become sources of market uncertainty. Yardeni Research has advised investors since September 15 to remain cautious and consider holding some cash in order to look for buying opportunities after the elections or if geopolitical risks intensify further.
Yardeni also warned that if U.S. political divisions widen further after the midterm elections, future negotiations over government debt and federal government shutdown issues could become more difficult, bringing new risks to financial markets in 2027. Nevertheless, he remains bullish on U.S. stocks' year-end performance, expecting the traditional "Santa Claus rally" from Thanksgiving through the end of December.
On the market side, after a week in which tech stocks led declines, U.S. stock index futures rebounded in early trading on Monday. S&P 500 futures rose 0.5%, Nasdaq 100 futures gained 0.8%, and Dow futures climbed 271 points, or about 0.52%. Investors are closely watching upcoming corporate earnings reports, employment data, and the results of the U.S. midterm elections.
However, retail investor sentiment remains relatively cautious. Data from the investing community Stocktwits shows that investors' view on the ETF tracking the S&P 500 has shifted from "bullish" the previous day to "neutral," while sentiment toward ETFs tracking the Nasdaq 100 and Dow Jones Industrial Average remains bearish.
Overall, Yardeni believes the recent tech stock correction is more a correction of excessively high valuations and overly concentrated positioning rather than a reversal of the AI industry's long-term growth logic. With valuations coming down and earnings expectations continuing to improve, AI-related sectors such as semiconductors are still expected to regain investor favor.
Comments