Yardeni Research Founder Ed Yardeni Talks S&P Outlook, Fed & Oil Prices

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Jonathan Ferro (0:07)

Ed Yardeni, of Yardeni Research, cutting his year-end target on the S&P to 7900 from a StreetFi 8400, writing, the risk of a downturn have increased. We raised the odds of a bearish outcome from 20 to 30%. Ed joins us now for more. Ed, welcome to the program, sir. You've darted things back just a bit, slightly less bullish. What's weighing on you heading into year-end?

Ed Yardeni (0:29)

Yeah, well, the key point in terms of what I've changed is I'm thinking it's going to take a little longer to get to 8400 I don't think it's likely to happen by the end of the year now. I think it's more likely to happen by the middle of next year. 7900 is still obviously above where we are now, so it would still give us an awfully good year of returns. But the issue for me is geopolitical developments have deteriorated. The war in the Middle East has escalated, and we're looking at higher for longer oil prices, and higher for longer oil prices increase the odds that some of that inflationary pressures from energy will spill over into core prices, as Bill Dudley, your interview with Bill Dudley, excellent interview indicated. And then in turn, we have not a one-and-done situation here with the Fed. We've got a situation where we're likely to have another one or two increases this year.

And then the bond market is concerning. My friends, the bond vigilantes have kind of gone wild all around the world. And I'm particularly concerned about the unwinding of the carry trade in Japan.

The US officials keep putting pressure on the Japanese to increase their interest rates at a faster rate, which makes sense from a macroeconomic standpoint. But unfortunately, we may find out that this leads to more unwinding of the carry trade, which means hedge funds that borrowed in Japan at very low interest rates, when the yen was getting weaker, now we'll flip around and say, you know, that financing is just too expensive now, too risky.

Jonathan Ferro (2:15)

So Ed, you gave us three things to think about there. Let's unpack them all. So you said geopolitics and what happened with oil. You talked about what it means for monetary policy and the spillover to the bond market. Let me just say on the first one. Does the first one inform the other two? How dominant is the situation in the Middle East? And to the people watching this at home that have become desensitized because it's gone on for seven months and they don't think it matters anymore, what's your message to them?

Ed Yardeni (2:37)

Well, look, we're back at a hundred and everything was just hunky dory when we came back down to about 80 or so a few weeks ago. But the problem is that everybody thought that this war in the Middle East would be over pretty quickly, especially at the beginning of the war when the leadership of Iran was decapitated. I thought the same thing for about one day, then I thought about it again. And I said, well, wait a second, the IRGC are professional terrorists that are basically ruling a country and they've got proxies all over that neighborhood. They're not going to give up just because they're getting bombed from the air. Military history shows that that just doesn't work. You need boots on the ground.

And so here we are in a situation where we're approaching the midterms and Iran has a great incentive to create more havoc to keep the price of oil up because they obviously would like Trump to lose his majorities, the Republican majorities in the House and the Senate.

Lisa Abramowicz (3:43)

Do you think that stocks are going to take longer to get to some of your loftier goals because of oil prices or because of rate hikes?

Ed Yardeni (3:51)

Well, I think it's a combination of everything. You know, the nice thing about being a strategist is it's pretty simple. It's P E times E. It's the valuation multiple times earnings. That's easy to do. Getting it right is the tricky part. I think the E, the earnings side, looks great. The economy is doing great. You know, I remain fundamentally bullish, but even more bullish have been the analysts because the companies have been reporting great earnings.

So, it's all about the valuation multiple. And as you know, as earnings expectations have increased, and I call it FEMA, Fabulous Earnings Momentum, the valuation multiple has actually gone down because investors are getting a little bit shy about paying for this remarkable outlook for earnings. And oh, by the way, the whole AI story has become a little bit more questionable. That's also sort of being delayed, if you will, or pushed out. And I think that also affects the valuation multiple because a lot of these AI stocks have very high valuation multiples.