- Investors could see stocks rally in the last stretch of the year, market veteran Ed Yardeni has forecasted.
- He says that’s because the Fed is likely done with interest rate hikes, which have weighed heavily on equities.
- Investors are pricing in a 59% chance the Fed will cut rates by September of next year.
Stocks could be primed for a big year-end rally, thanks to the combined tailwinds of strong corporate earnings and falling inflation, according to market veteran Ed Yardeni.
That’s partly because corporate earnings bottomed the past quarter, and are bound to surge higher into the end of the year, the Yardeni Research President said in an interview with CNBC on Thursday.
Wall Street is largely expecting firms to report improved profit margins over the past three-month period. Analysts are eyeing a 11.7% net profit margin for the S&P 500, above the prior quarter’s 11.6% net profit margin, according to FactSet data.
“So I think we’re going to get a very good earnings season, and I think that will help set us up for a year-end rally. Maybe a November-December Santa Claus rally,” Yardeni said.
Previously, he forecasted the S&P 500 to rally to 4,600 by year-end, implying a 6% increase from the index’s current levels.
That momentum will likely be coupled with a sharp drop in inflation, Yardeni predicted, shrugging off the latest Consumer Price Index report, where prices accelerated a hotter-than-expected 0.4% in September.
That increase is largely attributable to high rent prices, with shelter being the largest contributor to inflation last month, the Bureau of Labor Statistics said, with rent prices jumping 0.5% month-per-month and 7.4% year-per-year.
But real-time rental market data shows that rent growth is actually on the decline, Yardeni pointed. Asking rent prices climbed by just 0.2% month-per-month and 3.2% year-per-month, according to more recent Zillow data.
Those declines may not show up in the official CPI for 18 months, economists say, thanks to the lag in how housing prices are recorded. And that spells good news on the inflation front, as well as the outlook for interest rate hikes: When considering more timely rent data, inflation is likely hovering less than a percentage point above the Fed’s 2% target, Yardeni said, which can give central bankers room to dial back rates in the economy.
Rates are now hovering at their highest level since 2001 as the Fed remains hawkish on inflation. That’s weighed heavily on asset prices over the past year, with stocks sliding 20% in 2022.
“I think the Federal Reserve is done raising interest rates even though the inflation rate was somewhat hotter,” Yardeni said. “I think the Fed has to look at the overall number, and the overall number suggests to me that inflation’s turned out to be actually transitory instead of persistent, and I don’t even think it’s very sticky,” he later added.
Markets are largely expecting the Fed to dial back interest rates in the second half of 2024, which could be a bullish catalyst for stocks. Investors are pricing in a 59% chance that rates could be lower than the current level by September of next year, according to the CME FedWatch tool.
