Artificial intelligence investments and the S&P 500's rally are driving tech stocks higher, but are they becoming overvalued? Keith Lerner, Truist Co-CIO and Chief Market Strategist, joins Yahoo Finance Live to break down the potential risk developing in the tech landscape.

Video Transcript

- Well, as we've been talking about, it's been a big year for tech. The sector roaring back to gain more than 30% this year alone. And the rally gaining traction on cost cutting optimism and really AI buzz. Megacap tech stocks taking the S&P 500 along for the ride. The recent buzz around tech and AI is giving some investors early 2000's Dot-com deja Vu. After that, Dot-com burst and tech heavy NASDAQ composite plummeted from its 2000 high.

Will we see a similar story with today's AI boom? Joining us now Keith Lerner, Truist co CIO and chief market strategist. Keith, it is great to see you. And you have been looking at this analysis and parallel in detail here. And you had some really interesting findings particularly around valuations then and now and kind of where we are in this enthusiasm rally. So talk us through your thoughts here.

KEITH LERNER: Sure and good happy Monday, Julie. Great to be with you this off the week. So yes, I actually started my career in the mid '90s around the technology boom. So every time you start to see some of these technology stocks really start to move, there's questions-- is this a similar backdrop to the technology bubble. I will say there are some echoes meaning back then, if you put a dot com at the end of your name, you would see a pop in the stock.

More recently, you see in the quarterly earnings reports a lot of companies talking about AI, whether they're using it or not, it's contributing to movements. But I will say, at this point, as we look at two things, valuations and returns, it's really not comparable yet. I'll give you an example, Julie. If you look over the last year for the S&P technology sector, we're up about 27, 28%.

Heading into the peak during the technology bubble, we were up over 100%. On a three year basis back then, the technology stocks ran over 350%, not even close to 100% on the last three years. And valuations are certainly rich and you could argue that stretched relative to the last 20 years where there are about half the levels that we peaked out back to the technology bubble.

So I believe, to wrap that up, you can say things are rich, they're somewhat stretched, but I think a lot different than what we saw at the technology bubble, at least at this point today.

- Even as things look rich right now or are there still areas that you're kind of a little bit more bullish on long term where even though it seems rich, the return over an extended period of time depending upon an investor's time horizon could still look attractive?

KEITH LERNER: Yeah great, great, great, great question, Brad. Listen, we still like technology, we're on overweight several months ago along with communication services. And I think the reason why even though there are rich valuations where we're sticking with this area or even if they're due for some type of pause or consolidation which we expect is that one thing that's changed and got us more positive is that the earning trends are moving up after moving down last year.

And you got to remember too-- tech has had around trip. We're down 34% and we're off and we're up about the same off the lows this year. So put that in context. But even if the economy slows down, which we still expect, our thoughts is that companies will continue to need to invest in technology spend or fear of being left behind. So we think that's a little bit of subtle difference even in a weakening economic backdrop that companies will prioritize tech spending, which will continue to support that area. But of course, I can go into other sectors as well if you like outside of tech that we like. Let me know where you like to go next.

- Well, I want to stick with tech for just another sec, Keith, if we could because we've been talking all about CPI and the Fed this week. But we have a couple of catalysts more on the AI front or at least potential catalysts, right? We have Oracle reporting and we have AMD holding an investor day where they're expected to focus on AI. And I just wonder how much heft. you think these types of news events are going to continue to have in this very AI sensitive environment.

KEITH LERNER: Well, I think obviously people will continue to look at this and they want to see as far as is there a revenue generation. Right now, so far, we saw in the video actually with this big move up in revenues other companies are talking about it. I think investors want to see more of a direct line and say, is there a revenue and an income opportunity. So I think I think it is still important.

The only thing, I guess on a short term basis, we moved up a lot, we've had the news the last month around the Nvidia. So I don't know that they're going to be the market moving events it would have been a month ago because expectations are somewhat higher. But again, I think as we think about the next several months, next several years, AI is going to just be part of the discussion throughout most of these corporate quarterly earnings seasons for the foreseeable future.

- When we think about that too-- and it's clear that I is kind of that next leg of the digital transformation. But even as we think about that digital transformation, what we've seen in the past is that in the cloud, you don't have a box that's going to be the same as an Amazon Web Services type of cloud storage capacity. There are necessarily just winners and losers, but there are players that are miles ahead and have scale versus those that are just trying to look to benefit from the digital transformation, perhaps kind of offer a better price point as well along the way.

So I guess all of that considered, even in this digital transformation, are there companies that could have the rug pulled as a result of having some big AI announcements yet not being able to take on the same type of portfolio client base.

KEITH LERNER: Yeah, you hit it right on, Brad, because what's somewhat different right now-- a lot of people look for pure plays in this space. And the reality is there's a lot of infrastructure spending capital that's needed. And that's part of why these Magnificent Seven or whatever we call the top technology names-- that's part of the reason why they're betting so much. They're not a pure play, but they have the capital and the infrastructure in order to push this ahead.

And if we go back to the analogy of the tech bubble, we have to remember the internet revolution actually happened, but there was many companies that didn't survive. Even you could argue the king of the internet time was Amazon. And at some point, that stock was down 70% or 80% after the aftermath of the tech bubble. Now it came through the other side as we all know. So I think you're going to see the same dynamic as well.

You're going to see a lot of companies that haven't put an AI tag or have something specialty that are going to fail. But then we're going to see other companies that prosper. I think the challenge in part right now is it's really too early to know who will all the winners and losers are going to be. But in general, we still think the big cap tech will benefit and part of the reason why we remain overweight the S&P technology sector at large.

- Let's broaden it out a little bit, Keith, because we've been having this sort of mini debate, if you will, about whether we're actually now in a bull market, right? And I guess the implications of that are whether stocks are going to keep running, if they're going to keep going higher. My understanding-- I think you're neutral, if I'm not mistaken, on stocks overall. Talk us through your thinking here.

KEITH LERNER: Yes, we are strongly neutral.

- Strongly neutral.

KEITH LERNER: Strongly neutral, I know. [INAUDIBLE] you like to have a big banging call. But the reality is we're just seeing such a conflict of data right now. And one of the things we said coming into this year is keep an open mind because of this pandemic and the way things have kind of moved forward, is this different than the traditional playbook, which is being challenged.

So the way I would think about it is I think we're in this choppy trading range. I think the range has moved up partly because earnings are proving to be somewhat better than what we expected and I think the market expected us as a whole. And then the other thing is I think technology will continue to hold this premium valuation. So for you to look for a big new low in the market, you have to be bearish on tech alongside a recession as well.

So I think tech is going to hold up somewhat better. And I think really, what we're looking for is relative opportunities because if to have a big move up from here, I think it's somewhat challenging because you don't have the Fed going to go through a massive easing cycle unless the economy really weakens. The valuations are still at the high end of historical ranges.

So we can label this as a bull market, but I just think it's going to be somewhat different and it's not the type of bull market that we became accustomed to coming out of 2009 low, the 2020 low where you had all that fiscal stimulus, cheap valuations, and really negative sentiment. So I think it's going to be more of a choppy range with tactical opportunities. And right now, I heard earlier some your guests talking about this-- we also think there will be some catch up in the equal weighted S&P.

You had the worst relative performance since 1990. That's as far back as we have data. So we're likely to see some mean reversion. And then later this year go back to tech. But again, I think from our portfolio standpoint, we're sticking with the broad-based S&P, and we're having more of some of that equal weighted S&P just as a hedge for that mean reversion that we expect to continue near term.

- Keith, great to catch up with you. Thanks for joining us, Keith Lerner, Truist co-CIO and chief market strategist. Thanks.

KEITH LERNER: Thank you.