Every year, when most Americans are decorating Christmas trees and building gingerbread houses, a few markets-minded reporters are busy detailing the stock market and economic forecasts of giant investment banks for the coming year. Bank of America, JPMorgan Chase, Goldman Sachs, all of the big names are featured prominently in these year-end outlook articles—but interestingly, so is Ed Yardeni, founder of Yardeni Research.
Yardeni doesn’t run an investment bank, offering instead something more like a boutique sell-side investment consulting firm, but his years of experience as a chief investment strategist, economics professor, and Fed economist have earned him a reputation as one of Wall Street’s top analysts. This standing means Yardeni’s often prescient forecasts merit close attention. After all, he was one of the few analysts to accurately call last year’s stock market rally when most economists were still forecasting recession.
In a Sunday note, Yardeni outlined three throwback scenarios for stocks (and the economy) this decade. Two of these three “historical precedents” will be music to the ears of investors, but the other could be a nightmare.
Here’s how one of Wall Street’s most respected minds sees the U.S. economy and stock market heading back to the future in 2024.
The 1920s — 60% odds
With a string of positive economic data—including optimistic inflation figures, retail sales reports, and consumer sentiment surveys—helping lift two of the three major stock market indices to a record high last week, Yardeni argued Sunday that the U.S. economy is most likely headed for a “Roaring 2020s” scenario.
A combination of falling interest rates, fading inflation, and a productivity boom due to the deployment of new technologies like AI and robotics will ultimately help usher in an era of growth and abundance, according to the veteran economist and market watcher.
Yardeni has been pushing this Roaring 2020s idea since 2020, and recently made the case that the S&P 500 will soar 25% to 6,000 by the end of 2025 as a result of the upcoming economic boom.
On Sunday, he explained that his “basic premise” is that a “chronic shortage of labor” will force companies to rely on technological innovations to boost productivity this decade—and those innovations, from AI to 3d printing, will do just that. Rising productivity should lead to sustained economic growth, “subdued” inflation, and higher profit margins, while the chronic nature of the labor shortage will help wages grow.
After raising interest rates to fight inflation since March 2022, the Federal Reserve is also likely to cut rates in a Roaring 2020s scenario. And stock market investors would do “very well,” according to Yardeni, who believes there is a 60% chance that the Roaring 2020s becomes a reality.
The 1970s — 20% odds
Geopolitics can throw a wrench in even the best of economic machines. In the 1970s, there were two oil price shocks after the Yom-Kippur War of 1973 and the Iranian Revolution of 1979 that helped keep inflation elevated for over a decade. Now, (in an even shorter span of years), the Russia-Ukraine war and Israel-Hamas war have threatened a flashback to that era.
Consumers and businesses already felt the effects of surging natural gas and oil prices when the Russia-Ukraine war kicked off in 2022. And over the past few months, ocean shipping rates have surged after Houthi attacks on cargo vessels in the Red Sea amid the Israel-Hamas war.
Still, Yardeni noted on Sunday that inflation is moderating despite these developments. The crude market is also well supplied, which has helped prevent a serious oil price shock like what was seen during the 1970s amid the Red Sea crisis so far.
“There is still a risk of a second inflationary energy shock as occurred during the 1970s,” Yardeni argued Sunday, however, adding that “if the conflicts in the Middle East continue to spin out of control, oil prices could soar again. The Fed would be forced to raise interest rates in this scenario and cause a recession.”
For stock market investors, this inflation rebound and recession scenario would be a nightmare. They would end up doing “very badly” this decade, Yardeni wrote.
The 1990s — 20% odds
With AI and robotics booming, a few parallels can also be drawn between the current economic era and the dot-com bubble of the 1990s.
“In this one, the Fed becomes concerned that inflation is falling below 2%, and responds by aggressively cutting interest rates even though the economy continues to perform well,” Yardeni explained.
If the Fed were to quickly cut interest rates, the result would be “a meltup in the stock market with technology stocks leading the way,” he added. That’s awfully reminiscent of the dot-com boom in the 1990s, when internet stocks surged to unsustainable heights. But Yardeni warned that the end result of this scenario would also look a lot like the 90s—and that means a crash.
He argued that low interest rates would cause a “bubble” in tech stocks and other assets. The increasing net worth of consumers because of this bubble would then turn into “another round of price inflation,” forcing the Fed to raise rates and pop the bubble just like in early 2000.
This scenario may sound dire for investors, but it would likely offer some serious opportunity. “Irrational exuberance would make a comeback in this scenario,” Yardeni wrote, arguing tech stocks could soar to valuations not seen since early 2000. “It’s lots of fun for stock investors while it lasts.”
