Veteran Investor Ed Yardeni Reassures Market: No Recession on the Horizon, Earnings Support Bull Run
Despite recent market volatility and bearish concerns, veteran Wall Street investor Ed Yardeni, founder and CEO of Yardeni Research, insists a recession is not on the horizon, and the current bull market has strong support from earnings. This optimistic outlook comes amidst a recent market selloff, with mega-cap stocks experiencing declines while small and mid-cap stocks surged.
Key Takeaways:
- No Recession in Sight: Yardeni believes a recession is unlikely, citing robust inflows into US equities as evidence.
- Earnings-driven Bull Market: The current bull market is supported by strong corporate earnings, unlike the valuation-driven market melt-up of the 1990s.
- Recent Volatility a Temporary Selloff: The recent market selloff is likely just a temporary adjustment and not the start of a bear market.
- Positive Economic Indicators: Yardeni anticipates that a strong second-quarter GDP report and subdued inflation readings will sustain the market rally.
Recent Market Movements: A Temporary Correction?
Last week, the market experienced significant volatility, with the CBOE Volatility Index (VIX) spiking above 16, its highest level since April. This volatility was driven by a selloff in the S&P 500 LargeCap 500 Index, while the S&P MidCap 400 and S&P SmallCap 600 rallied alongside interest-rate-sensitive sectors.
While some investors interpret this as a sign of a bear market, Yardeni believes it’s a temporary adjustment, pointing to the lack of a significant rise in the dollar, which traditionally acts as a safe-haven asset during market downturns.
Earnings Powerhouse: A Key Differentiator
Yardeni acknowledges concerns about stretched equity valuations which could potentially hinder the market’s momentum. However, he emphasizes that the current bull market differs from the late 1990s market bubble, which was driven primarily by valuations. Today, earnings growth provides solid support for the market, as evident in the S&P 500 Information Technology and Communication Services sectors, which represent a third of the index’s forward earnings, a significant increase compared to the late 1990s.
A Closer Look at Earnings
Yardeni highlights the importance of earnings in maintaining a healthy market. The current bull market is not solely reliant on valuations, as seen in the strong earnings performance of major sectors like technology and communication services. This contrasts with the period leading up to the dot-com bubble, where valuations were the driving force of the market, even as earnings lagged behind.
Market Breadth and Investor Sentiment
While the recent rally in small and mid-cap stocks has broadened market participation, Yardeni remains cautious about its sustainability. He argues that some investors may have hedged their positions by going long on large-cap and short on small-cap stocks, or by shorting interest-rate-sensitive sectors. As the market rotation shifted against their positions, they were forced to deleverage or adjust their strategies, contributing to the recent volatility.
Despite this short-term uncertainty, Yardeni’s overall sentiment remains optimistic. He believes that robust economic indicators, including a strong second-quarter GDP report and subdued inflation readings, will help sustain the current market rally.
Factors Fueling Yardeni’s Optimism
Strong Economic Fundamentals
Yardeni cites strong economic fundamentals, including a robust second-quarter GDP report and subdued inflation readings, as factors supporting his optimistic outlook. These positive economic indicators suggest that the US economy remains resilient and capable of supporting continued growth in the coming months.
Healthy Investment Flows
The continued inflow of funds into US equities further strengthens Yardeni’s stance. Equity mutual funds and ETFs have recorded significant net inflows, demonstrating continued investor confidence in the US stock market.
Earnings-driven Market
Unlike the late 1990s, where valuations drove the market, the current bull market is underpinned by strong corporate earnings. This signifies a more sustainable growth trajectory, with earnings growth providing a solid foundation for future market gains.
A Word of Caution
While Yardeni paints a largely optimistic picture, he acknowledges the potential for short-term volatility, particularly driven by market rotations and shifts in investor sentiment. The recent selloff highlights the need to remain vigilant and cautious, as market conditions can change rapidly.
Yardeni’s Message of Hope
While market volatility is inevitable, Yardeni’s message offers a glimmer of hope for investors navigating the current market landscape. His belief in the resilience of the US economy, combined with the strong earnings support for the current bull market, provides a reassuring outlook amidst ongoing uncertainty.
