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There is a growing risk of stock market collapse, according to market veteran Ed Yardeni.
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Yardeni said the return of the Fed Put means stocks could soar due to the anticipation and realization of interest rate cuts.
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But stock market setbacks are rarely lasting and are often followed by a painful decline.
There is a growing risk that the Federal Reserve will trigger a stock market collapse, according to market veteran and investment strategist Ed Yardeni.
The “Fed Put,” or the idea that the Fed would save the stock market by cutting interest rates at the slightest sign of economic weakness, returned to markets after Fed Chairman Jerome Powell indicated last month that the next interest rate decision will likely be a cut, not an increase.
“Investor expectations that the Fed would nip a recession in the bud by easing means the Fed Put is back,” Yardeni told clients in a note Tuesday. “Its return reduces the risk of recession and bear market. It increases the risk of stock market collapse.”
Ultimately, investors’ anticipation of monetary easing from the Fed via interest rate cuts, whether realized or not, could trigger a new wave of animal spirits that propels the stock market much higher from now on.
Yardeni himself sees the S&P500 reaching record highs by the end of the year at 5,400, and also suggested that the index could skyrocketing by up to 25% to 6,500 through 2026.
“We do not expect a recession this year that the Fed would have to address by easing its measures. But as some investors believe this could happen, the Fed Put is back. It comes with an increased risk of collapse of stock markets,” Yardeni said.
Yardeni’s bullish outlook for stocks and the potential risk of an unsustainable stock market boom is aided by the fact that earnings expectations continue to rise after better-than-expected first-quarter results.
Wall Street analysts now expect S&P 500 earnings growth of 10.1% this year, accelerating to 13.9% in 2025 and 11.8% in 2026, representing an outlook of increasingly optimistic about corporate profits.
“As we have often observed in the past, if the odds of a recession are low, then the S&P 500’s forward earnings are a very good leading indicator of actual earnings,” Yardeni explained. And it’s rising profits that ultimately drive stock prices higher in the long term.
But the growing risk of a stock market crash coincides with the risk of a stock market selloff, because crashes are rarely lasting and are usually quickly followed by a rapid and painful decline.
The question for investors is whether a possible stock market collapse and subsequent decline will occur at prices much higher or lower than current levels.
Read the original article on Business Insider
