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AI hype shaking things up for 'MegaCap-8' stocks

Artificial intelligence and this week's market melt-up are driving mega cap tech stocks higher. Yardeni Research President Ed Yardeni joins Yahoo Finance Live to discuss the trends seen across the tech space and the potential to broaden out to other industries.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: The era of mega cap stocks is here with market leadership dominated by just eight names. And as these stocks break away from the rest of the pack, we're certainly seeing a shift in market behavior. Here to join us now with more on that, whether or not that can continues, Ed Yardeni, president of Yardeni Research. Ed, it's good to see you again. You're out with a recent note, first line. And this is all the AI euphoria leading the stock market into another mother of all melt-ups. What do you think?

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ED YARDENI: Well, I think we've already had a significant melt-up in the MegaCap-8 since they bottomed in early January. We're up about 58% since that bottom. So that is quite a melt-up in these stocks. And these are big cap names that usually don't move like that. Usually, it's small cap names that have those kind of moves. But clearly, investors feeling very, very comfortable with those stocks in an environment where there's still a lot of pessimism, still a lot of bearishness.

AKIKO FUJITA: At what point do we start to see those gains be broadened out a bit more?

ED YARDENI: Well, I think the bears have been saying that, because this market is so narrowly focused on just a few stocks, that it's still a bear market. And that it's going to mean a sell-off. But I think the market could just as well broaden out. I think it may very well be broadening out.

Let's not forget that the big run for some of these mega cap names really occurred with the banking crisis when people wanted to bail out of the banks. And they figured that if we're going to have a financial crisis, that can't be good for energy stocks. So they bailed out of energy stocks. But they still wanted to be in the market. And they figured out that the MegaCap-8 stocks have a lot of cash flow, don't need to go to the banks, and have a lot of technology upside.

SEANA SMITH: And there's discussion about whether or not this new market narrative, what we're seeing in terms of the leadership. If that's going to last, even if we do start to see broader participation, broadening out of the market leaders, I guess, how big-- how critical is the AI rallies, AI story to the continued success of so many of these larger tech names that have a heck of a lot of other things that are going into their businesses, and AI is only a very small part?

ED YARDENI: It's right. And it's just starting. There's a certain amount of hype. Nobody really knows the extent to which this really is going to be a huge technology. But everybody seems to figure it out that the MegaCap-8 stocks are going to be at the forefront of this technology and other technologies that are out there. It's not as though AI is the only technology that we have out there. We've got robotics. We've got automation. We've got nanotechnology. There's a tremendous amount of technologies that can be integrated to increase the productivity of the brain.

In the past, technology or innovations increased the productivity of brawn, of the ability to lift things, to move things. This, I mean, the ability to kind of remember everything that's known in history and recall it through AI is just an awesome development. But I think it's-- the market is just trying to figure out who else is going to benefit. The answer is everybody. I think you had a guest on before that basically said that.

and the idea that I-- that I'm toying with is that we increasingly have to think about every company as a technology company, because, if you're not using technology to increase your productivity, your efficiency, and it's not just AI, but if you aren't doing that, you're going to be left behind.

AKIKO FUJITA: You've been targeting 4,600 on the S&P 500 by the end of the year. You know, that's still a lot of upside from where current levels are right now. How much of that is going to be driven by this tech rally we've been seeing? How much of it ultimately you think comes down to where the Fed moves?

ED YARDENI: We have-- like the bears, I would feel more comfortable if the market broadened out. The bears are saying that it's not going to broaden out and instead we're going to have a sell off. I think it is going to broaden out. And I think we'd all feel better about the market if it broadens out. And I think one of the areas where it could broaden out would be in financials, the other energy, the ones that have been lagging behind here, the ones that have been viewed as potentially being vulnerable to a recessionary environment.

I think as investors calm down about the recession scare, I realize that we've been in a recession. It's just been a rolling recession, affecting different industries at different times. And on balance, the economy continues to grow around 1% to 2%. And earnings probably bottomed in the second quarter right now. And I think the market is looking already past the here and now to 2024. And that looks pretty good.

SEANA SMITH: So what does that mean then for the Fed? They're in a pretty tough spot just in terms of they're still in the fight against inflation much higher than where the 2% target where they would like it to be. Lots of questions just about how much of that work has already been done, and we need more time in order to see it work its way through the system. Are you expecting another hike? And how much of that is priced in?

ED YARDENI: I'm not. I'm thinking that Fed officials actually did a good job of telling us what they were going to do, what they wanted to do, what they wanted to achieve. And what they wanted to do, as they've been saying for months now, is they wanted to get the federal funds rate up to a restrictive level, restrictive enough to slow the economy down and bring inflation down.

I think 5%, 5 and a 1/4% on the Fed funds rate is proving to be restrictive enough. It seemed to have generated a mini-banking crisis, so we don't want to go there again and have it broadened out. So I think it would be a mistake for the Fed to raise rates. And, you know, they have said that they expect to be keeping the Fed funds rate at a restrictive level. Markets have been thinking they're going to bring it down. But I think they may very well achieve what they wanted-- keep it at 5%, 5 and 1/4% through the end of the year and then reassess things.

But it all adds up, I think, to a continuation of economic growth. I think inflation is going to continue to moderate. And it's not just about tight monetary policy, it's also that the pandemic caused a lot of the inflation. And the shock and the aftershocks of the pandemic are wearing off.

SEANA SMITH: Treasury now betting about a 70% chance that the Fed will keep rates steady at the meeting next week. Ed Yardeni, great to have you, president of Yardeni Research.

ED YARDENI: Thank you.