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[CC may contain inaccuracies] It's now recommending effectively going underweight the mega-cap tech stocks versus the rest of the S&P 500. Veteran strategist Ed Yardeni says he sees more competitors coming for the juicy profit margins of the Mag Seven. Yardeni is also seeing little reason to stay overweight on the U.S.
in the all country world MSCI portfolio. Some global peers have outperformed the S&P 500 this year on cheaper valuations and the weaker dollar. Let's talk to the man himself. Ed Yardeni is president at Yardeni Research. And Ed, why that change? It is a massive change for you. Well, it's always time to think about the future when you get to the end of a year.
2025 is almost over. We're now thinking about 2026. I've been recommending overweighting information technology and communication services since 2010. The problem is it's worked all too well. The two sectors now account for a humongous 45% of the market cap of the S&P 500. Of course, their earnings share has also increased, but nowhere near as as far.
And the same thing can be said about looking at the U.S. versus the global economy. When you look at the U.S. MSCI relative to the World MSCI Index, what you see is the U.S. now accounts for 65% of the market cap of the world's stock market. So it's hard to recommend overweighting something that's already quite overweight.
I mean, if you just told people just to maintain the current weight of the index, that would still be an overweight position relative to what most people would think would be a diversified portfolio. Ed, what's fundamentally changed, because when we talk about the overstretched valuations, there have been that way for a very long time now.
And when you take a look at the AI cycle, people still point to how it is still at the nascent stage. Well, I would say with regards to the Magnificent Seven, what's I think has changed is that they're competing more aggressively against each other and they've got more competition coming out of nowhere and somewhere and on a regular basis here.
We recently saw that Google introduced Gemini three, which suddenly made everybody kind of reconsider just how strong the position is of OpenAI and OpenAI's relationship to lots of other AI-related companies. And then just at the same time, Deep Sea came back, remember DeepSeek when it introduced its model back in January of this year, kind of shocked everybody because they were able to put together a pretty good a model that worked as well as some of the other ones in the United States.
But apparently it was was trained on chips that cost a lot less and now looks like they're doing it again. And there's some talk that the latest version of the DeepSeek model is just as good as Gemini three. So there's a lot of competition. The profit margins have been awfully high from the Magnificent Seven.
That usually invites a lot of competition, and that's exactly what's happening. And by the way, once you look at the S&P 500 and look outside of the Magnificent Seven, there's what I call the impressive 493. There's still plenty of good stocks out there of companies that are going to be using all these technologies, are using all these technologies to increase their productivity and to increase their profit margins.
So I think the broadening out of portfolio from the Magnificent Seven to the 493 would make sense to me.
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