Veteran Wall Street Investor Downplays Recession Odds: 'Current Bull Market Has More Support From Earnings'

A recession is not on the horizon, according to veteran Wall Street investor Ed Yardeni, founder and CEO of Yardeni Research.

The current bull market has more support from earnings, he added.

Commenting on the recent market events, Yardeni noted the significant movements last week, which saw mega-cap stocks decline while small and mid-cap stocks rose. He emphasized that this was likely just a temporary selloff.

“Last week, the CBOE Volatility Index (VIX) popped above 16, its highest level since April. The selloff in S&P LargeCap 500 index and the concurrent rally in ‘SMidCaps’ (i.e., the S&P MidCap 400 and S&P SmallCap 600) and interest-rate-sensitive sectors fostered higher stock market volatility,” he said.

Yardeni suggested that the stock market selloff since the July 16 record high in the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, might not last long.

“If a bear market were kicking off, we'd expect safe-haven investment inflows to boost the dollar. Meanwhile, the DXY is down 1.4% in the last month,” Yardeni wrote.

The expert praised Monday’s rebound in the S&P 500 (1.1%), Nasdaq (1.6%), Russell 2000 (1.7%), and the Magnificent Seven (2.4%).

A solid second-quarter GDP report on Thursday and a subdued June Personal Consumption Expenditure (PCE) inflation reading on Friday will sustain the current market rally, Yardeni said.

Addressing Bearish Concerns

Yardeni explained the rationale behind last week’s market moves. Investors hedged by going long on large-cap and short on small-cap stocks, or shorting interest-rate-sensitive sectors — such as real estate, utilities, industrials, and materials —had to deleverage or pivot as market rotations went against their positions.

“For now, we’re in the camp that breadth is broadening to the S&P 493, but we’re not convinced that the SMidCap rally has legs,” he said.

Yardeni highlighted the concerns of bearish investors who warn that stretched equity valuations might halt the market’s momentum.

He acknowledged that the current rally is reminiscent of the valuation-led market melt-up of the 1990s, but also that hat “the current bull market has more support from earnings.”

“For example, while the combined market cap of the S&P 500 Information Technology and Communication Services sectors comprises 41% of the S&P 500, matching the 2000 peak, the two sectors currently represent a third of the S&P 500’s forward earnings, versus less than a quarter in 2000,” Yardeni explained.

He emphasized that a recession is not expected in the near future, supported by the substantial inflows into US equities. On a 12-month sum basis, equity mutual funds and equity ETFs had net inflows of $410.5 billion through May, the highest reading since October 2022.

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