-
The stock market will continue to reach record highs, driven by reasonable valuations and continued earnings growth, according to Ed Yardeni.
-
He highlighted AI as a reason to remain bullish on stocks as the benefits spread to more companies.
-
“The broad market is not overvalued, in our view, and could rise with a combination of better earnings and a higher valuation multiple.”
O record rally in the stock market is not close to being over, according to industry veteran Ed Yardeni.
While investor concerns have grown about a narrow market rally concentrated in large-cap technology stocks, stretched valuations and growing signs of an economic slowdownYardeni finds solace in the fact that profits continue to impress.
“These are all legitimate concerns. Here are some reasons to be a little less concerned,” Yardeni told clients in a note on Sunday.
Expectations of future profits increase
Analysts’ future earnings expectations reached an all-time high last week, illustrating that the market’s recovery is supported by what matters most: profits.
Analysts now place the S&P 500 annualized earnings per share of US$261.74.
“All of this assumes, as we do, that a recession is unlikely anytime soon, especially since the Fed will lower interest rates to avoid one if necessary,” Yardeni said.
Market breadth will improve
While the stock market rally has been driven primarily by a concentrated handful of companies, improving earnings breadth should lead to an improvement in market breadth, according to Yardeni.
“The percentage of S&P 500 companies with positive three-month percentage changes in future earnings rose to a bull market high of 83% during the week of July 5. This argues for an expansion of the breadth of the stock market”, explained Yardeni.
Assessments are not stretched
While the S&P 500 has a high forward P/E multiple of about 21x, the index’s average forward P/E multiple is just 17.8x.
“The broad market is not overvalued, in our view, and could rise with a combination of better earnings and a higher valuation multiple by the end of the decade,” Yardeni said.
Yardeni told CNBC in an interview Monday that he expects the S&P 500 to print solid earnings growth between now and the end of the decade, with the index printing earnings of $250 per share this year, $270 next year. and up to $400 by the end of the decade.
AI is a big part of Yardeni’s bullish outlook, and he pointed to Corning’s increased guidance for the second quarter as evidence thatin the AI boom will spread for other companies.
Corning soared 10% on Monday after saying generative AI technologies have generated strong demand for its optical connectivity products, which are a key ingredient for data centers.
“It just demonstrated that the AI story is legitimate. Many companies are benefiting from AI,” said Yardeni.
And on the question of whether the stock market is repeating the 1990s dot-com boom through the AI growth story, Yardeni said some things look similar, but the Fed could ultimately lower rates. interest rate if the economy and markets turn south.
“There’s a certain déjà-vu again when we look at the market and compare it to what happened in the late 1990s. I guess the way I would describe things is that we’re in a slow-motion merger.” Yardeni said.
“The market in recent weeks has continued to march higher to new record highs and it has done so on the back of disappointing economic indicators because I think investors have concluded that we shouldn’t worry too much about the economic slowdown or even a recession, because if This happens to become a significant risk that the Fed will move too quickly to lower interest rates,” Yardeni said.
Read the original article at Business Insider
