AI fatigue takes centre stage as Fed fears ease: Ed Yardeni

While investors continue to debate whether the U.S. Federal Reserve will keep interest rates elevated for longer, market strategist Ed Yardeni from Yardeni Research believes monetary policy is no longer the biggest force driving equities. Instead, corporate earnings, geopolitical stability, and an evolving artificial intelligence trade are shaping market direction.

Speaking to ET Now, Yardeni said investors have largely adjusted to the prospect of higher interest rates and are increasingly focusing on broader market fundamentals.

Fed No Longer the Market's Biggest Driver

Yardeni believes the Federal Reserve has adopted a hawkish stance following its latest policy meeting and recent comments from Fed Chair Kevin Warsh. However, he argues that easing inflation and resilient economic conditions have reduced the central bank's influence over market sentiment.

"Well, I think that the Fed, certainly as a result of the latest meeting of the Federal Open Market Committee and the recent comments by the new Fed Chair, Kevin Warsh, came across as very hawkish. However, inflation is coming down, thanks to the drop in oil prices, and other factors may also contribute to that. So, it may very well be that what the market is factoring in is some tightening over the next 6 to 12 months. So, the Fed is not a very relevant factor right now for the market. I think what is, is earnings and, of course, the fact that the war in the Middle East seems to be over," he said.

'AI Fatigue' Is Leading to Sector Rotation
According to Yardeni, the recent weakness in semiconductor and technology stocks reflects what he calls "AI fatigue" rather than a loss of confidence in artificial intelligence itself. Investors, he said, are becoming more selective as the technology matures.

"Well, what we are seeing here is what I call AI fatigue. People are just getting really tired of the AI trade. It is making everybody's head spin because there are so many issues being raised about where this is all going. By now, everybody recognises that AI is the real deal, that it is a technology that is here to stay, that it could be as important, if not more important, than the internet. But as we saw with the internet and previous revolutions in our economy, not everybody wins. There are always casualties, and just when you thought one company is the winner, it becomes the loser," he said.

Higher Rates Unlikely to Hurt AI Investment
Despite concerns that elevated borrowing costs could weigh on AI-related investments, Yardeni believes financial markets have already adjusted to the higher-rate environment.

"Well, the market has already adjusted to higher-for-longer interest rates, and I really do not know that there is anything abnormal about that. I think a 10-year bond yield in the U.S. of about 4.5% is where it should be. That is normal. So, we need a free bond market, a bond market that properly allocates capital, and we are there. The way I read Kevin Warsh is that he is basically saying he wants the Fed to provide less guidance to the market and get more guidance from the market. What he is really talking about is listening to the bond market, and the bond market right now is saying that the economy is in good shape, inflation will probably moderate, and there is really no reason for the Fed to do much of anything," he said.

Labour Market Remains Balanced
Commenting on the latest U.S. employment report, Yardeni acknowledged that the data contained several unusual elements but maintained that the broader labour market remains healthy. As a result, he believes the Fed's priority should continue to be inflation rather than employment.

"Well, we had one of the strangest employment reports I can recall. A lot of people scratched their heads and wondered what that was all about. There seemed to be a lot of anomalies. Things just did not make much sense, so everybody wants to look at the next number. But when you look at all the labour market indicators we have, they show that the labour market is in balance. Supply is more or less equal to demand. So, I think, from the Fed's perspective, focusing on getting the inflation rate down to 2% should be more important than helping the labour market, which right now does not really look like it needs much help," he said.

Outlook
Yardeni's assessment suggests that while interest rate expectations remain important, investors are paying greater attention to earnings growth, market leadership beyond technology, and the long-term commercialisation of artificial intelligence. His view also indicates that a broadening market could replace the narrow AI-driven rally that has dominated Wall Street over the past year.