Ed Yardeni, founder of Yardeni Research, has been one of Wall Street’s biggest bulls over the past few years. While many experts warned of recessions and debt crises, Yardeni has repeatedly argued that we’re in the middle of the “Roaring 2020s”—an era when inflation will fade and new technologies like AI and robotics will help spark a productivity boom. Last December, the veteran market watcher even predicted the S&P 500 would surge 30% to 6,000 by the end of 2025, a price target that seems far less sensational after the blue-chip index’s more than 10% rise year to date.
But this week, Yardeni reminded investors that even if the stock market hits his lofty price target, it won’t surge in a straight line. “There has been no turbulence in the stock market’s smooth ascent to new record highs,” he wrote in a Tuesday note to clients. “Nevertheless, we should expect some turbulence for the stock market ahead.”
Yardeni highlighted a few key reasons for his “turbulence” call, including rising geopolitical tensions that are putting pressure on oil prices; a few big earnings misses from U.S. corporations; and a still-robust labor market that could keep the Federal Reserve from cutting interest rates soon. Just like Fed Chairman Jerome Powell has said time and again ever since he began raising interest rates in March 2022, the path to lower inflation is likely to be “bumpy” for the economy and markets.
Don’t expect market-juicing interest rate cuts anytime soon
At the end of 2023, most investment banks were expecting the Fed to cut interest rates by 100 basis points this year, with some anticipating the first cut as soon as March. The outlook for sinking borrowing costs helped push stocks higher since their October 2023 low. Now, though, with the economy proving its resilience to higher rates, and two hotter-than-expected inflation reports in January and February leaving Fed officials less confident that inflation has truly been tamed, Wall Street has a different outlook for interest rates.
The current consensus outlook is for three 25 basis point rate cuts this year, with some having even more pessimistic views. Atlanta Fed president Raphael Bostic, who is a voting member of the Federal Open Market Committee (FOMC) that sets interest rates, said this week that he expects only one rate cut this year, and not until November or December.
The latest Job Openings and Labor Turnover Survey (JOLTS) could be a key reason why. It showed that job openings remained elevated at 8.75 million in February, something the Fed has been trying to prevent. “That’s a relatively high reading and well above pre-pandemic highs, suggesting that the labor market remains robust. So there is no need for the Fed to lower interest rates anytime soon,” Yardeni wrote of the JOLTS data.
Some big earnings misses
A few big-name companies also reported relatively weak earnings this week, which helped push markets lower Tuesday. First, Tesla published its first-quarter vehicle production and deliveries report for 2024, revealing that its deliveries fell 8.5% from a year ago in the first quarter. The EV giant’s stock fell as much as 6.7% on Tuesday after the news broke, before recovering some of its losses. And while shares were up 0.5% as of midafternoon on Wednesday, Tesla is now down more than 32% year to date amid demand concerns.
Intel shares have also plummeted 10% this week after its foundry unit, which makes semiconductors, posted a $7 billion loss in 2023, $1.8 billion more than in 2022. Intel has made a big push into chipmaking amid the AI boom and U.S.-China tensions, which put chip supplies under threat, but so far, it’s been difficult to turn a profit.
Shares of health insurers also fell sharply on Tuesday. Yardeni explained that it was because “the Biden administration didn’t boost payments for private Medicare plans as much as the insurance industry and investors had hoped.”
Rising oil prices and the threat of an Israel-Iran conflict
Finally, WTI crude oil prices—a benchmark for oil markets—have surged from $71 to $85 per barrel this year amid rising geopolitical tensions, low oil inventories, and OPEC+ production cuts. That could exacerbate U.S. inflation. Yardeni is particularly worried about the impact of the Israel-Hamas conflict on oil prices.
“Since Hamas attacked Israel on Oct. 7, 2023, our number-one concern has been that the war between these two mortal enemies could turn into a regional war with a direct confrontation between Israel and Iran that could disrupt the global supply of oil,” he wrote.
Israel bombed Iran’s embassy in Syria on Monday, killing seven military advisors, and Iran has vowed to retaliate after the strike. It’s “a major escalation in Israel’s war with its regional adversaries,” Yardeni said.
The veteran market watcher, who also holds a Ph.D. in economics, reiterated his recent recommendation to investors to look to the S&P 500 energy stock index for a “shock absorber in portfolios for the mounting geopolitical risks in the Middle East.”
Bank of America Research’s commodities and derivatives strategist, Francisco Blanch, noted that oil demand has already been “boosted” as a result of Houthi attacks on container ships in the Middle East, which forced many to use longer trade routes. Ukrainian attacks on Russian oil refineries have also “impacted supply.”
Blanch increased his 2024 price target for WTI crude prices on Wednesday to $81 per barrel, and warned prices could peak at $95 per barrel this summer. “Low oil stocks, OPEC+ output cuts, geopolitical tensions, and robust economic growth have flipped petroleum price trends,” he wrote.
