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Ed Yardeni, president of global strategy and asset allocation analysis company Yardeni Research, has projected the S&P 500 (SP500) to reach 5,400 next year by year-end with EPS of $250 — the highest target among consensuses.
If that proves right, he said, the price index for the end of 2025 would surpass 5,800. Last week, Yardeni raised their 2025 price target to 6,000. “In other words, we think that the bull market has staying power.”
As of Tuesday, end-of-day, the S&P 500 (SP500) finished at 4,775.
Here are his 12 reasons why he sees a “roaring 20s” scenario:
- The economy might remain resilient, but inflation would fall closer to the 2% target, pushing the Fed to lower rates twice next year by 25 basis points each time, instead of four times.
- Although excess savings are reducing and personal debt might increase, consumers will continue to have purchasing power “as long as their job security remains high,” he wrote. The labor force increased 3.3M year-to-date and unemployment is at 3.7%.
- Household net worth totaled a record-high of $151T by the third quarter, with liquid assets, and will benefit even more after the Fed lowers short-term interest rates.
- Labor demand is strong. November saw better-than-expected retail sales led by food services. Also, employment in the leisure and hospitality industries and the health care sectors remains high.
- Manufacturing companies from the U.S. and other countries are onshoring to the U.S. supply-chain disruptions during the pandemic. Also, geopolitical tensions between the U.S. and China have encouraged onshoring. This administration’s infrastructure spending is also boosting the construction industry with new orders for machinery, which is up 30.5% over the past two years through October.
- Lower U.S. mortgage interest rates will boost new and existing home sales, which would also boost house-related retail sales for appliances and furniture.
- U.S. corporations have been able to generate cash flow, totaling a record $3.4T during the third quarter — up 4.1% year-over-year — despite profit margin pressures from high labor costs and interest rates.
- Inflation on durable goods and many nondurable goods came from pandemic-related supply-chain disruptions. The Global Supply Chain Pressure Index jumped from 0.1 in October 2020 to 4.3 in December 2021. It has now returned to 0.1 in November of this year. Now, the services inflation shock is “showing signs of dissipating. Expect it to just do that in 2024,” Yardeni said.
- Companies are spending more on technology to boost their productivity. Now, production of high-tech equipment and software is at all-time highs. “We believe that a major cycle in productivity growth started at the end of 2015, when it bottomed at 0.5% (based on the 20-quarter average) and rose to 1.8% during the third quarter,” he wrote. “We expect productivity growth will peak around 4.0% by the end of the decade.”
- Impending recession leading indicators are misleading. The leading economic index is biased towards predicting the goods sector more than the service sector, and while there has been a recession in the goods sector, “but it has been more than offset by strength in services, nonresidential private and public construction and high-tech capital spending.”
- Industrial production in defense should continue to rise to new record highs due to the geopolitical turmoil. The wars in Eastern Europe and the Middle East “should remain contained regionally,” as well China’s invasion of Taiwan, which changes are reduced due to China’s economic troubles. In addition, China’s property bubble will remain a major source of global deflationary pressures and Europe’s recession should recover next year.
- Finally, this positive economic data should bolster the equity market. The Fed’s Summary of Economic Projections has signaled that inflation can subside without a recession, Yardeni said.
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