Why Luke Lango is excited by yesterday’s selloff … today’s woeful equity risk premium … protective action steps in your portfolio … opportunities are suddenly here Like everyone else, we’re continuing to process yesterday’s DeepSeek news that sent leading tech stocks reeling. To help us, we’ll turn to our resident tech expert, Luke Lango. In Luke’s Innovation Investor Daily Notes yesterday, he did a deep dive into the situation. After walking through DeepSeek’s alleged cost advantage over U.S. incumbent AI platforms (and expressing suspicion about it), Luke pivoted toward why yesterday’s news was a net win for U.S. AI investors: Even assuming all of DeepSeek’s cost claims are true – which we doubt – we believe the implications of such a massive AI model efficiency breakthrough are hugely positive for AI stocks. On the AI Builder side, we do not think this means that less money will be spent on the AI infrastructure buildout. The total volume of money spent on AI infrastructure over the next several years will equal the training cost per model times the number of models built. An AI model efficiency breakthrough does theoretically mean lower training costs per model. But it should also mean more models being built. Regardless of this breakthrough, AI is still the future of everything. Every company knows that. So, if AI model training costs drop dramatically, do you really think companies are going to cut their AI budgets? No – they’re just going to start creating more and more AI models… Meanwhile, on the AI Applier side, it’s all great news. [Companies like Coca-Cola and Pepsi can] leverage the DeepSeek breakthrough to create more AI models with the same level of spend. That means both companies will be getting far more bang for their buck. They’ll become even bigger AI Appliers. And they’ll likely see their revenues soar while their costs stay constrained. The DeepSeek breakthrough is a huge net positive for AI Applier stocks. The bottom line is that Luke remains very bullish on top-tier AI stocks, with a slight tilt toward AI Appliers over AI Builders. And – critically – yesterday was not a reason to follow the herd and sell your quality AI holdings. We’ll keep you updated as our analysts continue digesting the DeepSeek news along with its implications and opportunities. On that note, later today, our editor-in-chief and fellow Digest writer, Luis Hernandez, is interviewing Luke along with Louis Navellier and Eric Fry. He’ll be getting their take on DeepSeek, its impact on the AI stocks that are likely in your portfolio, and how investors should respond. We’ll bring that to you as soon as it’s available. | Recommended Link | | | | With Trump’s aggressive policies AND quantum leaps in AI all hitting at once, we are now sitting in the eye of the largest, most volatile storm to ever hit the stock market. Many will lose big. But for those who prepare, it could be the greatest wealth-building moment in history. Jeff Clark, a 40-year trading veteran, has a time-tested strategy that thrives in chaotic times. His gains speak for themselves: 238% on Citibank in 2 days, 186% on GDX in 8 days, 144% on Disney in 6 days. Now, he’s revealing how you can use this same strategy to turn Trump’s honeymoon period into massive profit opportunities. Stream the event replay before it disappears tomorrow night and get ready. |  | | Though yesterday’s selloff serves as a fantastic buying opportunity for leading AI plays, it’s critical to be selective about what you’re buying today Behind this is a simple reality… The average stock is not attractive at today’s valuation. Let’s jump to The Wall Street Journal from yesterday: Stocks haven’t looked this unattractive, by at least one measure, since the aftermath of the dot-com era. Plenty of investors are piling in anyway. The equity risk premium, often defined as the gap between the S&P 500’s earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point. 
Source: WSJ To make sure we’re all on the same page, the equity risk premium (ERP) is a way to compare the relative attractiveness of stocks versus bonds. We begin with the expected earnings of stocks, divided by their price. We then take this “earnings yield” and compare it with the return on the “risk free” 10-year Treasury Note. The difference tells us how much additional return that stock investors are receiving for accepting the heightened risk of investing in stocks over bonds. Without such a higher return, investors have no reason to accept the additional risk that comes with stocks. After all, doing so would be what the legendary Jim Grant calls taking on “return-free risk.” Back to the WSJ: In recent weeks, a combination of higher Treasury yields and soaring equity valuations pushed the equity risk premium into the red. That could pose a threat to the recently rekindled stock rally. But there are additional cautionary signs for investing in the average stock today You could throw a dart at a wall of stock market valuation indicators and pretty much hit one that’s at or near an all-time high. To illustrate, below we look at a chart from Bloomberg and Macrobond. It’s showing us the S&P 500’s return since 1900 along with a compilation of the average percentile reading of the S&P’s trailing price-to-earnings ratio, forward price-to-earnings ratio, CAPE ratio, price-to-book ratio, price-to-sales ratio, EV/EBITDA, Q Ratio, and Market Cap to GDP. This valuation reading has never been higher, even exceeding the Dot-Com Bubble and the pre-Great Depression 1920s. 
We’re not predicting that stocks must fall tomorrow. However, as we’ve pointed out in the Digest many times, valuation matters. The more you pay for an asset today, all things equal, the lower your return will be tomorrow. Starting valuations are also largely predictive of long-term returns going forward To illustrate, below are data from LPL Financial. We’re looking at what subsequent 10-year returns have been for the S&P based on starting price-to-earnings valuations. With today’s starting valuation of 30.5, LPL’s study suggests 10-year return will be flat or negative. In the graphic below, I’ve added a red circle and a red line below to make this easier to identify. 
Source: LPL Research Here’s LPL’s take: That forecast may end up being overly pessimistic given the potential for a further structural shift higher in valuations as in prior decades, but it does suggest that another decade of double-digit annualized returns, which investors have enjoyed over the past 10 years, is unlikely. To be very clear, the takeaway here is not “get out of stocks.” We remain very bullish on a handful of thematic plays, especially top-tier AI stocks that are suddenly selling at far lower prices today after yesterday’s bloodbath. But the data tell us that the average stock does not offer an attractive risk/reward tradeoff today for investors. Two important steps to take today First, evaluate which stocks in your portfolio are fantastic stocks that are long-term holdings. These are the stocks that you plan to own despite any correction. Make sure you’re comfortable with a major pullback, call it 40% - 50%. While this might sound like a lot, remember, the Nasdaq fell about 80% in the Dot Com crash. Also, based on LPL’s research, make sure you’re able to hold these positions for 10+ years before returning to today’s price. Again, for perspective, following the Nasdaq’s high in March 2000, it took 15 years for the Nasdaq to final surpass that level. Second, designate which of your stocks are not long-term holdings. These are your speculative stocks (or trades) that you’ll sell if/when they fall to a pre-appointed stop-loss level. Make sure you know exactly what this level is for each of these holdings. If you’d like help, I’ll point you toward our corporate partner, TradeSmith. They’re one of the leading quant shops in the investment industry. Unlike how most investors use trailing stops (a blanket “20%” lower), TradeSmith’s trailing stop system factors in the specific volatility of any given stock/ETF to help investors answer a crucial question: When you’re in a pullback, how do you know whether it’s just normal volatility to ride through, versus a “this time is different” drawdown to avoid immediately? You can learn more about it here. Whatever is right for you, make sure you have some steps in place to protect your capital if/when your speculative stocks begin pulling back. With these risk mitigation steps in place, remain in this market and take advantage of broad selloffs like we saw yesterday While emotional investors were bailing on AI stocks yesterday, legendary quant investor Louis Navellier told his subscribers that many of AI’s brightest stocks are due for an “incredible reversal.” Let’s return to Louis’ Flash Alert podcast update from Growth Investor yesterday: [Yesterday’s] sell-off today is a reaction. People this weekend were engrossed in watching football and other things – there were thin market conditions in the aftermarket. Now we’re getting some liquidity coming in, and I think once we learn more about the situation, we’re going to see an incredible reversal. This has us looking for buying opportunities in the market’s best AI plays. | Recommended Link | | | | What’s coming could accelerate the global economy by as much as 250 times its normal rate. It also threatens to ruin the financial outlook for millions of Americans. Whether or not you’re an investor, you still need to prepare. Click here for 3 steps to take now. |  | | Eric Fry recently tipped us off to one such opportunity For months, Eric has been tracking the advancements toward artificial general intelligence (AGI). In September, he began the clock on this “1,000 Days to AGI” countdown. He’s been eying which stocks are best positioned to capitalize on the transformative technology. Earlier this month, we featured analysis from Eric that highlighted leading datacenter plays – many of which were dinged up yesterday. From that analysis: Data centers provide the essential foundations that enable AI technologies to function and progress toward AGI. Therefore, companies that supply or enable various facets of data center infrastructure could enjoy years of boomtime conditions. Eric flagged three leading datacenter-related companies that he liked but hadn’t recommended because each was trading at an elevated valuation. One of those stocks was Quanta Services (PWR). Well, yesterday, in the wake of the DeepSeek news, Quanta fell 18%. As I write Tuesday, it’s yet to bounce. A sale price of “18% off” goes a long way to a more attractive entry valuation. If you’re looking to take advantage of this type of selloffs, consider using Eric’s preferred investment vehicle I’m talking about “LEAPS,” which stands for “Long-Term Equity Anticipation Security.” These long-dated option can generate returns of 100%, 200%, and even 1,000%, and more while the underlying stock itself moves just a fraction of that amount. That’s not an embellishment. Here’s Eric with one of his most recent LEAPS winners: Just [last] week my Leverage subscribers booked partial gains of more than 550% on a dynamic LEAPS call option I recommended just a year ago on an AI-focused high-tech materials firm. We’ve still got a quarter position open on that trade – and thanks to taking profits along the way, we’re guaranteed a total gain of at least 230% on this trade, even if the stock goes to zero from here. Eric just put together a free research video that dives into more details of his LEAPS strategy. As Eric puts it, “You can use this strategy to turn small moves in stocks over a year or two into huge gains.” Click here to learn more. Wrapping up – here are three takeaways from today - Don’t bail on your leading AI plays – yesterday’s news is not a death knell…
- Be careful about any “average” stocks in your portfolio – they’re likely not providing you an attractive risk/reward tradeoff…
- It’s time to bargain hunt for top-tier AI stocks that were caught up in yesterday’s emotion-based selloff…
We’ll keep you updated on all these stories here in the Digest. Have a good evening, Jeff Remsburg | 
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