The stock market is about to be saved by strong 3rd-quarter corporate earnings as year-end rally shapes up

• A resilient economy is going to save the stock market with a year-end rally looking likely, according to Ed Yardeni.
• Yardeni said that because third-quarter GDP is running ahead of analyst expectations, corporate earnings results should be strong.
• "We see a yearend Santa Claus rally back to 4600, or close to that level," Ed Yardeni said.

Strong corporate earnings are set to save the stock market after a poor showing in the third quarter, according to market veteran Ed Yardeni.

Yardeni said in a Sunday note that while the S&P 500 could still fall to its rising 200-day moving average at about 4,200, there's more upside than downside heading into year-end.

"We see a year-end Santa Claus rally back to 4,600, or close to that level," Yardeni said, which represents potential upside of 7% from current levels.

Yardeni expects the strength in stock prices will be driven by a strong showing in third-quarter corporate earnings results.

"We believe that the Q3 earnings season will be much better than widely expected," Yardeni said. "We predict that S&P 500 operating earnings per share will be at a record high during the final quarter of this year."

That potential earnings strength is despite the ongoing strike at the big three automakers, threats of a government shutdown, and increasing credit losses at banks.

Yardeni's confidence stems from the fact that third-quarter GDP estimates are turning out "to be well above consensus forecasts."

The GDPNow forecast from the Federal Reserve Bank of Atlanta suggests third-quarter GDP growth will be 4.9%, which is well above consensus forecasts of about 3%. At the start of the quarter, most forecasts were for less than 1% GDP growth this quarter.

But as consumers and the economy remains resilient, there is still one glaring risk that could upend Yardeni's bullish market prediction, and that's higher interest rates.

"The biggest risk to our optimistic outlook for the economy and stock market is that the bond vigilantes might be about to send a very loud message to Washington: 'Cut the deficits or we will raise bond yields until they cause a credit crunch and a recession," Yardeni said.

The 10-year US Treasury yield was at 4.65% on Monday, a massive surge from its sub-1% levels in late 2020.