Investors’ enthusiasm for the potential of artificial intelligence to boost productivity and usher in a new era of growth helped stocks rebound from a brutal 2022 decline in the first half of the year. Even if the Federal Reserve raises interest rates to combat inflation, the S&P 500 still rose by about 20%, briefly touching 4,600 points at the end of July. For Ed Yardeni, founder of Yardeni Research, the stock market rally was expected but “ahead of schedule” – meaning a near-term pullback is coming.
“Our conclusion is that the (S&P 500) index could fall to its 200-day moving average, currently about to 4200 points.”
The S&P 500 has stayed that way ever since, down about 7% to 4,280 by midday Monday. Yardeni believes the index “could easily” fall to his forecast level of 4,200 in October, but then expects a comeback.
“We see a year-end Santa Claus bounce back to 4,600, or close to that,” he explained, quickly adding that this assumes there is no prolonged auto strike, government shutdown or “surprise credit losses from the banks.” . ”.
Despite concerns about the impact of rising borrowing costs on banks and other companies, Yardeni believes the third-quarter earnings season is likely to be “much better than consensus” and that S&P 500 operating earnings per share will end the year at a record high. That year.
Even amid rising interest rates, stubborn inflation and the war in Ukraine, S&P 500 operating earnings per share rose about 29% to $54.56 in the second quarter of this year from about $42 before the outbreak, he said. Now, with some economic headwinds fading, profits have even more room to grow. “After all, third-quarter real GDP looks likely to be well above consensus forecasts,” he noted.
Yardeni believes third-quarter GDP is now between 3% and 4%, according to Baird and EY.
EY Chief Economist Gregory Daco explained in a note on Thursday that third-quarter GDP data will indicate that a recession is “not in the near term,” noting that due to “one-time boost,” the data may even be particularly strong. ” from Taylor Swift and Beyoncé’s summer tours to Barbie and Oppenheimer movies.
Other economists have raised their forecasts for third-quarter GDP growth in recent months due to the resilience of the labor market and consumer spending. The Philadelphia Fed’s economic forecasting group said in August that it now believes real GDP, which measures inflation, will grow at an annual rate of 1.9% in the third quarter, up from a June forecast of just 0.6%. “The U.S. economy looks stronger over the next three quarters than it did three months ago, according to 37 forecasters,” the Philadelphia Fed said in a report. statement About the investigation.
Yardeni isn’t the only one making bullish predictions about the stock market. Goldman Sachs analysts, led by chief U.S. equity strategist David Kostin, explained in a note on Monday that they expect the S&P 500 to end the year at 4,500.
Kostin and his team noted that throughout the year companies have struggled with rising input costs due to inflation, but now those headwinds are slowly receding, which should boost profitability for S&P 500 companies. Looking ahead, they say, investor enthusiasm for artificial intelligence may actually make sense, arguing that “AI-driven revenue and productivity growth” could significantly lift the S&P 500’s annual average earnings per share over the next 20 years. Share earnings growth.
“While there is considerable uncertainty about the timing of AI’s impact, some companies are already discussing ways in which AI can improve productivity and reduce costs,” they wrote.
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