(Bloomberg) — U.S. stocks could reach new highs thanks to the Federal Reserve’s aggressive half-percentage-point rate cut last week, but it could also lead to inflation if central bankers don’t tread carefully, Wall Street strategist Ed Yardeni said.
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The latest policy decision raised the chance of a “full meltdown” of stock prices — such as during the dot-com bubble, when the S&P 500 Index rose 220% from 1995 to the end of the century — from 20% to 30%. He put the chance of a bull market at 80%, while reserving a 20% probability for a scenario like the 1970s, when stock markets around the world were gripped by volatility due to inflation and geopolitical tensions.
But there is a greater risk if the situation becomes too hot under the feet.
“If they overheat the economy and create a bubble in the stock market, they create problems,” the founder of the eponymous firm Yardeni Research Inc. said in an interview with Bloomberg Television on Monday, adding that the Fed is ignoring the upcoming U.S. presidential election, in which both candidates are proposing policies that could trigger inflation.
The comments come as policymakers reiterate their confidence in their decision to make a large cut to kick off the easing cycle. Minneapolis Fed President Neel Kashkari said Monday he supported the half-point cut but expected smaller quarter-point moves at meetings in November and December. Meanwhile, his Atlanta counterpart Raphael Bostic said last week’s big move will help push interest rates closer to neutral levels as risks from controlling inflation and employment become more balanced.
Stocks had a rough start to the month, with the S&P 500 Index falling more than 4% in its first week. But since then, investor confidence that officials can engineer a soft landing has grown, sending the broad stock benchmark on track for its best September — historically the worst month of the year for the index — since 2019.
Yardeni again leaned into his idea that markets are in a new “Roaring ‘20s” period, characterized by productivity, growth and substantial stock returns. However, he said his chances of such a scenario had dropped from 60% to 50%.
The fortune-teller, typically one of the most bullish forecasters on Wall Street, has an S&P 500 target of 5,800, according to the latest Bloomberg survey of strategists. That once-eye-popping forecast now appears to be in line with many of his bullish peers, who have been steadily raising their forecasts to keep pace with the S&P 500’s 20% rally this year.
BMO Capital Markets has the highest forecast for the U.S. equity benchmark at 6,100, while Evercore ISI expects the gauge to close at 6,000 by the end of the year. At the other end of the spectrum, Barry Bannister, chief equity strategist at Stifel Nicolaus & Co., warned last week that the market is in a dotcom bubble, “Groundhog Day,” and said stocks could fall as much as 13% in the fourth quarter.
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