Wall Street veteran investor Ed Yardeni has spotlighted potential turbulence ahead for the S&P 500 index, forecasting a “classic 10% correction” in the coming months.
This prediction comes as markets digest a scenario where the U.S. economy avoids any hard or soft landing, an outcome that seemed unlikely only months ago.
Analyzing recent economic indicators, Yardeni noted, “The US economy refuses to land and rising yields are starting to weigh on the stock market.”
His observations follow a robust retail sales report for March, which prompted the Atlanta Fed’s GDPNow model to adjust its Q1 real GDP growth estimate up from 2.4% to 2.8%, with real consumer spending also revised upward.
“That’s neither a hard nor a soft landing. The US economy is still flying high,” Yardeni commented, indicating a sustained economic momentum contrary to recession fears.
He pointed out the persistent consumer spending, buoyed by increases in real disposable income and the financial stability of retiring Americans, as well as the economic contributions from over six million newcomers to the U.S.
Forget About Fed Rate Cuts
According to Yardeni, the rise in Treasury yields reflects a growing investor belief that the Federal Reserve may maintain the current federal funds rate throughout the year, influenced by stronger-than-anticipated economic growth, persistently high CPI inflation, and increasing oil prices.
“We don’t think that the Fed will raise rates again this year, but we’ve pushed back against the widely-held notion of several cuts this year and argued that no cuts at all was increasingly likely. Now that’s our base case scenario,” he wrote in a recent note.
Yardeni Expects A 10% Market Drop
With the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, retreating from its March 29 high of 5,254.35 to 5,061.82, sliding below its 50-day moving average, Yardeni believes the market’s immediate future could be rocky.
“The market was overbought and may now be moving towards being oversold,” he stated, referencing a significant drop in stocks above their 50-day moving average—from over 80% at March’s end to just 30% today.
Looking ahead, Yardeni anticipates the index could test its 200-day moving average around 4,700 in the coming months, marking a potential 10% decline from recent highs.
Chart: S&P 500 Breaks Below 50-DMA , Yardeni Now Eyes 200-DMA Test
This correction would align with typical market cycles observed in past periods of economic recalibration, solidifying his view that investors might need to brace for further declines as the market adjusts to this “no-landing” scenario.
Moreover, the situation is further complicated by escalating geopolitical tensions in the Middle East and the ongoing conflict between Russia and Ukraine.
“Investors may have to give up on expecting any rate cut this year,” Yardeni stated.
Image generated using artificial intelligence via Midjourney.
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