Ed Yardeni believes inflation is fading, the Federal Reserve is done raising interest rates, and, with AI advancing at a breakneck pace, stocks are set to soar. By 2025, the famed market watcher and founder of Yardeni Research sees the S&P 500 jumping nearly 30% to 6,000.
“Christmas is in two weeks. This year's Santa Claus rally started early… Will it last through Christmas? Will the rally continue through the end of this year, and maybe through the end of 2024 or even 2025?” he quipped in a Sunday note. “We think so.”
That’s a bold call. After all, the S&P 500 has returned around 10% annually to investors since its creation in 1957, and those numbers were boosted by the massive rise in share prices after the Global Financial Crisis and pandemic when interest rates were held near zero to help stimulate the economy.
But Yardeni said Sunday that he is "seeing more reasons" to believe in a “roaring 2020s scenario,” where productivity booms and living standards rise globally amid rapid technological innovation. And it makes sense to pay attention—when it comes to market forecasting, Yardeni’s on a roll.
Some impressive predictions
At the beginning of October, the S&P 500 was coming off a 7% correction after hitting a high of 4,588 at the end of July. The blue-chip index was still up over 10% on the year, but the pullback brought bearish analysts who had predicted a dismal year for stocks due to rising interest rates out of hiding.
Then Ed Yardeni came out with a contrarian call. He argued that the S&P 500 would fall below its 200-day moving average of 4,200 in October before experiencing a “Santa Claus rally” up to 4,600 by year-end.
The prediction was eerily prophetic. By Oct. 27, the S&P 500 sank to 4,117, just as Yardeni had forecast. And since then, his Santa Claus Rally has become a reality, with stocks surging to over 4,600 amid strong earnings results and falling inflation.
The signs the ‘Roaring 2020s’ are becoming a reality
While many Wall Street veterans have been cautious throughout 2023 with rising interest rates slowing the economy, Ed Yardeni has been leading the bulls’ charge. His optimistic, and now seemingly quite prescient, outlook is based on a few key factors: fading inflation, falling interest rates, and a technological revolution.
Fading inflation
First and foremost, Yardeni said Sunday that “lower-than-expected inflation could turbocharge Santa's sled,” leading stocks to continue rising in 2024. High costs have hampered businesses and slowed consumer spending over the past few years, but that could change in 2024.
Inflation has fallen from its June 2022 peak of over 9% to just 3.2% in October. And November’s inflation data could be even lower due to falling gasoline and rent prices, according to Yardeni, who noted that the Cleveland Fed's Inflation Nowcasting model is showing just 3% inflation for November.
Americans’ inflation expectations, which economists believe are critical to controlling consumer price increases, have also fallen recently. Last month, short-term median inflation expectations sank to their lowest level (3.4%) since April 2021, according to the New York Federal Reserve.
Falling interest rates
Falling inflation means falling interest rates, and that should be a boon for markets, according to Yardeni. Rising rates have made borrowing costs increasingly painful for many U.S. firms in 2023, but that pain may be over soon.
Yardeni is betting that, after years of hawkish rhetoric, Fed Chair Jerome Powell is ready to soften—even suggesting that rate cuts may be coming. Powell is scheduled to speak after the Federal Open Market Committee (FOMC) meeting on Wednesday, and Yardeni believes he will come across dovish. “Our bet is that he will acknowledge that if inflation continues to moderate towards the Fed's 2% target next year, the FOMC will probably lower the federal funds rate so that the real federal funds rate doesn't get even more restrictive,” he said. “That would be bullish.”
Don’t forget the innovation boost
Fading inflation and sinking interest rates are an ideal recipe for stock market gains, barring a dip from economic cooling into outright recession. But Ed Yardeni’s “Roaring 2020’s” prediction is more about long-term technological innovation than near-term economic trends.
Yardeni has argued this year that the release of OpenAI’s ChatGPT in November 2022 might well have been the event that launched the “Roaring 2020’s.” He foresees an era where AI will boost productivity, cut costs, and increase living standards across the globe—a sharp contrast to some on Wall Street who believe the hype surrounding AI is overblown.
And it’s not only AI: Yardeni believes technological innovation in robotics, gene-editing, and quantum computing will help usher in a new era of economic global growth this decade. The veteran market watcher predicted in a CNBC interview this summer that his economist peers will look back on the current era in 2030 and say: “It started out awful, but ended up awfully good.”
