Having the bond market regulate the AI trade is a big positive, says Ed Yardeni

[00:00:00] Speaker 1: In his latest note, our next guest says the bond vigilantes are now doing a good job of regulating and allocating capital to the AI ecosystem. Here to explain is Ed Yardeni himself. He is the president of Yardeni Research. Ed, lay it out. What are you talking about? [00:00:15] Speaker 2: Well, the bond market is finally paying attention to credit quality in the bond market for AI credits, which is good. I mean, it's good if the bond market gets ahead of the credit rating agencies and really assesses the riskiness. So if that's the case, then the allocation of capital should be more efficient and the dodgier credits will have to pay a lot more and that might slow them down, which I think having the bond market regulate the AI trade is a big positive. You're referring to what happened last week with Corweave and then bled through to a lot of the other companies. And then, you know, the bond market woke up and realized that not all these credits just because they were all AI related didn't mean they were all AAA, quite the opposite. [00:01:02] Speaker 1: So there are some people who worry that this was going to puncture the AI build out. You're saying maybe this prevents an implosion. [00:01:10] Speaker 2: Yeah, I don't know what we're rooting for anymore. You know, for a while there, everybody got absolutely concerned that we were building too fast and now the market is going to regulate that. I think that's a positive for the economy, for eliminating or reducing the risk of a bubble. I think over the past few weeks, we've sort of eliminated the 1999-2000 analogy for that kind of bubble. And I think over the past week or so, we've really kind of shown a path that is sustainable in terms of credit access to for AI companies. [00:01:50] Speaker 1: Look, there are people who looked at that and said, oh, this is bad news because now people are panicked. Do you think the things that spread beyond some of those very initial companies was not warranted? You know, that that that or do you think that this is something because all of a sudden people looked at anthropics numbers and thought, wow, the rate of growth is slowing pretty rapidly. [00:02:12] Speaker 2: I have a fatigue. I mean, every day we get a headline that changes everybody's opinion. It wasn't a few weeks ago. We were all concerned there was going to kill 10 percent of the population in the world. And now we're concerned that credit credit's going to be too tight for AI and we're going to lose our competitive advantage. But look, I think there may be overreactions and it may very well be that a company like Corweave, as NVIDIA's head says, is a legitimate business. And there's no reason to be concerned about it. And so I think the market will sort it out. [00:02:51] Speaker 1: You're not somebody I think of as whistling past the graveyard, even though you are pretty positive about where things are going. I'm guessing you're watching some metrics pretty closely. What would those be for the economy, for the A.I. [00:03:02] Speaker 2: I think clearly during earnings seasons, we want to see what the cloud revenues are and we want to see a really healthy growth rate there. I mean, Gartner's has said that the amount of revenues that these companies are going to have to generate just aren't realistic in order to pay for all this. But again, all the more reason to cheer that what the bond market doing is a healthy development. But yeah, the revenues on cloud computing and also the backlog. [00:03:38] Speaker 1: You're talking about from the Amazons, from the Meta. [00:03:40] Speaker 2: Yeah, exactly. That's where the money is to really fund all this. I mean, had it not been for this, there would have been a lot of free cash flow. But the free cash flow now is a substantial amount being used to finance these data centers. [00:03:54] Speaker 1: How are you feeling about your target, your lowered target of $7,900 for the end of the year? You think we'll still be looking through earnings and feeling pretty good about things? [00:04:02] Speaker 2: Well, mid-September, you know, the bond market started to move towards 5%. The price of oil went back up to $100. It looks like we're going to have higher for longer oil prices, which means stickier for longer inflation. I think the Fed's going to give us two more rate increases. If not by the end of the year, by early next year. And so I think those really play on the valuation multiple. The earnings outlook is phenomenally strong. We've been thinking $425 a share for the S&P 500 next year. The industry analysts are there now. And what the industry analysts are saying now about 2028 is basically $500 a share. We thought $500 a share would be something like in 2030. So the good news is still very much on the earnings side. The uncertainty is on the valuation side. $8,400 by the middle of next year, I think, is more realistic than by the end of the year. But we could have a very strong year-end rally and still looking for $10,000 by the end of the decade. [00:05:07] Speaker 1: What gets us to $8,400 by the middle of next year? Is that just more earnings power, raw earnings power? Or does the valuation multiple come back, too? [00:05:16] Speaker 2: Earnings have been so amazing that I felt inspired to come up with an acronym, FEMO, Fabulous Earnings Momentum, to distinguish it from FOMO. FOMO is really more a valuation metric. It's, you know, fear of missing out. There isn't a lot of fear of missing out here in the face of remarkable earnings. I think investors are almost, like, in shock by the kind of numbers that the analysts are putting out there. But the reason they're doing that is because the companies have been delivering very solid earnings, and not just the AI companies, by the way.