We're nearly seven months through the year, and so far it isn't really turning out the way many economists and analysts predicted. The broader benchmark S&P 500 is up nearly 19% so far, and the tech-heavy Nasdaq Composite is up roughly 37%. And this run transpired while many forecast persistent high inflation and/or some kind of hard landing for the economy. Even now, many claim the market is due for a big pullback.
Longtime market strategist Ed Yardeni, founder of Yardeni Research, isn't in that group. He said he believes the good times can keep rolling and potentially lift the S&P 500 by as much as another 20% from current levels by the end of 2024. Here's why he's being so bullish.
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There's a clear path to growth
Yardeni spent four decades on Wall Street, serving various roles, including chief investment strategist of Oak Associates, Prudential Equity Group, and Deutsche Bank. Given his experience, he often gets asked about the current state of the market. His current assessment is that concerns about the market getting too frothy are overblown.
Yardeni wrote in a recent research note:
The S&P 500 is hot. The Nasdaq is even hotter. The mounting concern is that both might be getting too hot, resulting in a stock market melt up that could set the stage for a meltdown. If so, we expect that the downdraft would be a correction rather than a new bear market.
Yardeni believes recession concerns are overblown and places the odds of a recession over the next 2.5 years at just 25%, largely because he expects consumer spending to continue to hold up nicely. Yardeni has previously said that he thinks the U.S. is currently experiencing a rolling recession in certain sectors, such as manufacturing, goods, and housing.
But now, with outsized inflation fading, Yardeni sees a "disinflationary soft-landing scenario" as more likely than a recession and also thinks the Federal Reserve will raise interest rates for the last time this year at its upcoming meeting this month.
"The week's economic indicators will mostly show that the economy is continuing to muddle along without an economy-wide recession," he wrote in his note. "We will be looking for signs that the rolling recession in the goods sector is turning into a rolling recovery."
As for his price prediction for the S&P 500, Yardeni thinks the index will end 2024 somewhere between 4,800 and 5,400, which implies as much as 20% upside from the 4,500 level the S&P was at when Yardeni published his note.
Yardeni arrived at his target by modeling $270 of earnings for the S&P 500 by 2025, which is actually slightly below the consensus estimate. Then, Yardeni expects the market to value the index between 17.8 and 20 times forward earnings by the end of 2024.
Can Yardeni's prediction come true?
I think one of the best things Yardeni and any current bull has going for them is that the market's strong run this year has been largely driven by the "magnificent seven" stocks, such as Apple and Tesla. There are still a lot of stocks and sectors trading at very reasonable, if not cheap, valuations.
What could take the wind out of the bull's sales is if inflation doesn't keep receding toward the Fed's preferred 2% target. We also simply do not know the outcome just yet of all the Fed's rapid interest rate hikes and quantitative tightening, although the consumer and labor markets continue to impress.
While I could see the market continuing its rally, I would caution investors from getting too overhyped or giving in to FOMO (fear of missing out). If you are going to buy a stock that has already had a massive run this year, make sure you can justify the valuation or have a long-term investment thesis that gives you confidence in buying a company already trading at a big valuation.
