Despite $100 Oil and Bond Shock...Wall Street Veteran Maintains "S&P 500 Year-End 8,400" Forecast

▲ S&P 500, International Oil Price, Artificial Intelligence (AI), Treasury Yields/AI-generated Image

The shock from oil prices and bond yields has intensified. However, Ed Yardeni, president of financial market analysis firm Yardeni Research, maintained his year-end forecast of 8,400 for the S&P 500.

In an interview with Bloomberg on September 14 (local time), Yardeni stated that he had lowered the probability of a market optimistic scenario from the previous 80% to 70%. This is due to increased risks in international oil prices and the bond market. However, he maintained the S&P 500's year-end target of 8,400, citing stronger-than-expected corporate earnings. Yardeni said, "Reality is showing risks, but the earnings side is truly amazing."

The core reason Yardeni is not abandoning his bullish outlook is corporate earnings. He initially expected Wall Street's S&P 500 earnings per share (EPS) forecast for next year to reach $415 by the end of this year. However, market expectations have already risen to $419. Yardeni anticipates it will climb further to $425 by year-end. Applying a price-to-earnings (P/E) ratio of 19.7 to this figure leads to the calculation that the S&P 500 will reach approximately 8,400. He explained that he lowered the target P/E ratio to reflect investor anxiety, even as he raised earnings forecasts.

The biggest variables are oil prices and bond yields. Yardeni believed that the U.S. economy could withstand oil prices of $100 per barrel, but he assessed that it could put a burden on inflation and the Federal Reserve's (Fed) interest rate policy. He stated that if the U.S. 10-year Treasury yield remains between 4-5%, it could be interpreted as a sign of a robust economy. Conversely, he warned that concerns could grow if interest rates quickly surge to 6%. High risk-free rates diminish the attractiveness of stocks and could put pressure on AI-related stocks.

He also mentioned the possibility of a U.S. Treasury response if bond market instability deepens. Yardeni suggested that former U.S. Treasury Secretary Scott Bessent could utilize a strategy of increasing short-term Treasury issuance and decreasing long-term Treasury issuance. He explained that former U.S. Treasury Secretary Janet Yellen reduced market pressure in a similar way when the 10-year Treasury yield rose to 5% in 2023. Yardeni also cited the fact that the unit labor cost growth rate remained at 1.4% as evidence that a productivity-driven technology boom is continuing.

He dismissed concerns about a slowdown in AI investment. Yardeni believed that infrastructure investment would not significantly decrease merely due to calls to slow down AI development, as there are already physical constraints on the speed of data center construction itself. He agreed that stronger safeguards are needed for AI. However, he stated that the U.S. has a strong motivation not to fall behind China in AI competition, making it highly likely that the trend of technology investment will continue.

[Article Key Summary]

-Ed Yardeni lowered the market optimism probability from 80% to 70% to reflect oil price and bond yield risks, but maintained his S&P 500 year-end forecast of 8,400.

-Yardeni expected next year's S&P 500 earnings per share (EPS) forecast to rise to $425 by year-end.

-A rapid surge in the U.S. 10-year Treasury yield to 6% could put greater pressure on stocks and AI-related stocks, but he saw a low probability of a slowdown in AI infrastructure investment.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*