Eric Fry’s thoughts on Physical AI… bad ISM data has Louis Navellier talking recession… be careful about today’s market valuation… is it time to take profits on Big Tech?
Yesterday, we featured a video interview between legendary investor Louis Navellier and Luis Hernandez about the next great shift in artificial intelligence – Physical AI.
This technology is poised to reshape the real world in ways we’re only beginning to understand.
Today, we’ll continue this conversation with the second video in our special series exploring the rise of Physical AI – and how you can position yourself before this transformational trend goes fully mainstream.
As a reminder, this all stems from a research initiative that began two years ago when Louis, Eric Fry, and Luke Lango launched the AI Revolution Portfolio – a handpicked basket of AI stocks with 5X, even 10X potential.
Since then, AI technology has accelerated dramatically – and we’re now witnessing the next phase of the AI story: AI that moves, touches, and transforms the physical world.
Investing in the companies driving this new era of Physical AI today could position investors for lifechanging returns tomorrow as the technology reshapes industries and daily living.
To that end, Louis, Eric, and Luke have just updated their portfolio to include the best Physical AI stocks to own today as this new era begins.
It’s called the Day Zero Portfolio, focused entirely on the companies leading this next wave. You can learn more here.
In today’s video, InvestorPlace’s Chief Content Officer and fellow Digest writer Luis Hernandez sits down with Eric to go even deeper into the implications of this next chapter.
Among the topics they discuss are:
- Where we are in the timeline of the transition to physical AI
- What most people are getting wrong about how this technology will evolve
- How concerned we should be about widespread job displacement
If you’re trying to make sense of where AI is really going next, this is a conversation you don’t want to miss.
To watch Eric and Luis, click here or on the screenshot below.
Are we headed toward a recession?
This morning brought a new ISM Services report that’s raising fears of stagflation.
The U.S. services sector barely stayed in expansion territory in July, with new data from the Institute for Supply Management (ISM) showing signs of economic strain as tariffs begin to bite.
The ISM’s services index came in at 50.1, just above the contraction threshold of 50 and marking its weakest reading since May 2020.
Economists polled by Dow Jones had expected a more solid 51.2, following a reading of 50.8 in June.
For more color, let’s go to Louis and his Growth Investor Flash Alert this morning:
The only way [the ISM data] gets fixed…is for the housing sector to recover.
There’s a lot of durable goods that go into homes, and that’s why interest rates have to come down and be cut.
So, we are teetering on a recession here, folks, and I don’t like to use that R word, but that’s what’s happening.
This reading puts even more weight on the Federal Reserve to cut interest rates in September.
Meanwhile, the bond market is putting additional pressure on the Fed. Since mid-July, the 10-year Treasury yield has fallen from almost 4.50% to 4.20% as I write Tuesday.
As Louis often says, the Fed doesn’t like to fight market rates – and today, the market is saying “go lower.”
Here’s Louis’ overall take:
We have some anxiety appearing in the market. We have some nervousness – even I’m mentioning the R word…
I don’t think we’ll slip into a recession because we have the tax cuts that put more money in people’s pockets and increases the velocity of money.
But it would be great if the Fed would get together and cut rates before the September FOMC meeting.
We’ll be tracking this.
By the way, a quick “congratulations” to Louis’ Growth Investor subscribers. Even though the market is down as I write, one of Louis’ picks is soaring today on strong earnings.
Axon Enterprises (AXON) beat on earnings and raised guidance last night. It’s up nearly 16% as I write mid-afternoon.
Again, “congrats” to all the Growth Investor subscribers. To learn more about joining Louis in Growth Investor, click here.
More reasons to be careful today
Not bearish – but careful.
Let’s begin with some big-picture perspective.
Stocks are very expensive as measured by several indicators. But the valuation indicator screaming “watch out!” the loudest is perhaps the “Buffett Indicator.”
If you’re less familiar, the Buffett Indicator compares the total market capitalization of a country’s stock market to its Gross Domestic Product (GDP). It’s commonly used to assess whether a stock market is overvalued or undervalued relative to the size of the economy.
As to how to interpret the Buffett Indicator, in his 2001 interview with Fortune, Buffett said:
If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire.
Well, as of yesterday, this indicator clocked in at 208% according to Guru Focus.
The last time the Buffett Indicator rose this high (roughly 200%) was in early 2021. Within a short span, the market entered the 2022 bear market where the S&P dropped about 25% from its January 2022 peak to its October low.
Today’s valuation is above that threshold again, raising the question: is history repeating?
Even if it is, that doesn’t mean all stocks are “sells” today. We must dig deeper than a surface level analysis of the S&P 500.
After all, as we often write here in the Digest, it’s not so much a “stock market” as it is a “market of stocks” with wildly different, unique return potential.
Let’s go one level deeper by looking at the S&P 500 versus its Equal Weight counterpart
Even though the market isn’t far beneath all-time highs, not all stocks are near their own record levels.
To get a sense for this, let’s look at the S&P 500 compared with the S&P 500 Equal Weight index.
As the name suggests, the “Equal Weight” index gives equal representation to each stock in the S&P instead of giving the biggest stocks heavier allocations.
As you can see below, the S&P – reflecting the outperformance of Big Tech – is nearly 2Xing the performance of the equal weight return over the last year.
This return differential is due to the outperformance of a handful of mega-cap tech leaders that exert a heavy influence on the S&P 500.
Now, historically, when index concentration surpasses extremes – like 30–40% in the top 10 – the Equal‑Weight index tends to outperform in subsequent periods as breadth returns.
Here’s Reuters with where index concentration stands as of the last week of July:
The top 10 weights in the S&P 500 last week hit 37.3% of the index, near the 38% level it reached in January, which had been its highest level on record, according to S&P Dow Jones Indices, citing data since 1975.
These massive stocks generally have higher valuations. The top 10 stocks have an average price-to-earnings ratio of about 26 times, compared to 20 times for the rest of the S&P 500, said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
“The biggest stocks are very expensive,” Shalett said. “If the biggest stocks fall the most, the index is very vulnerable.”
Circling back to Eric, he’s been warning about the higher valuation in mega-cap tech stocks
While Eric is bullish on AI (especially physical AI today), he’s concerned about the price that investors are paying as they pile into Big Tech at current valuations.
From Eric:
I wouldn’t touch a single overhyped tech stock right now.
While these firms may seem attractive to investors, like Nvidia Corp. (NVDA), the truth is that their valuations are overshot, landing them in the stratosphere.
For instance, Nvidia’s market cap sits at $4.23 trillion, the highest in the world. It is currently trading for 56X its trailing price-to-earnings (P/E) ratio, or about double the market average.
I recommend avoiding stocks like these because their high valuations yield to low valuations… eventually…
That is why I look for companies that have a promising runway built by strong fundamentals – attractive valuations.
Eric is officially recommending investors exit their Amazon, Tesla, and Nvidia positions. And in his new “Buy This, Sell That” research report, he highlights more attractive tech options priced for more sustained growth. The report is free, with Eric revealing specific names and ticker symbols. Just click here for more.
(Disclaimer: I own AMZN).
To what extent is expensive Big Tech driving your portfolio today?
If the answer is “a lot” – first, congratulations – you’re likely sitting on some great returns. But if so, might it be time to take some profits, derisking your portfolio?
It doesn’t mean you need to get out of tech and AI completely, but it might mean following in Eric’s tracks: looking beyond the expensive mega-cap leaders that are in everyone else’s portfolio today – and zeroing in on the lesser-known AI plays trading at more attractive valuations.
Coming full circle, if the economy is, in fact, on the verge of stumbling, the stocks that will get hit the hardest are those that are currently priced the highest.
Bottom line: It’s time to be careful today – not bearish, but careful.
Have a good evening,
Jeff Remsburg
