The stock market is approaching 2 catalysts that will spark the next leg of the bull run, market vet says

• The record stock market rally will get a boost from key economic data and earnings results, Ed Yardeni said.
• Second-quarter GDP and June PCE releases on Thursday and Friday could fuel the soft landing narrative.

The stock market rally is set to continue this week as investors digest two key pieces of economic data and an onslaught of second-quarter earnings results.

That's according to a Monday note from Yardeni Research, which highlighted the upcoming release of second-quarter GDP and the June PCE index as key to the continuation of the stock market rally.

"We expect that a solid print in Q2's real GDP on Thursday and a subdued June PCED inflation reading on Friday will keep the rally going," Ed Yardeni said in the note.

Economists estimate second-quarter GDP growth to hit 1.9%, and June Core PCE to rise 2.5% year-over-year, not far off from the Fed's long-term inflation target of 2%.

If the economic data comes in as expected, it would enable continued chatter of a soft landing in the US economy and give the Federal Reserve even more reason to cut interest rates at its September policy meeting.

And while bearish investors argue that the market is too overvalued for the rally to continue and that stocks are in bubble territory similar to the dot-com era, Yardeni Research disagrees.

That's because the stock market's record rally in is supported by underlying company earnings in a way that it wasn't 24 years ago.

"We've acknowledged that the current stock market rally is reminiscent of the valuation-led market meltup of the 1990s. But we've also noted that the current bull market has more support from earnings," Yardeni said.

The research firm highlighted that the combined S&P 500 allocation to the information technology and communication services sectors is at 41%, similar to its peak in 2000.

But whereas those two sectors represented less than a quarter of the S&P 500's earnings at the peak of the dot-com bubble, today those two technology-focused sectors make up one-third of the S&P 500's forward earnings per share.

What's encouraging to Yardeni is the fact that second-quarter earnings are already delivering.

With 16% of S&P 500 companies having reported second-quarter earnings so far, 84% are beating profit estimates by a median of 4%, while 63% are beating revenue estimates by a median of 3%, according to data from Fundstrat.

"So far, Q2's earnings reporting season is going well. The blended reported/estimated earnings growth rate for the S&P 500 has stopped its recent fall and edged up to 8.2% y/y during the July 18 week. We are expecting 10%-12% y/y," Yardeni said.

Looking forward, Yardeni expects the S&P 500 to print significant growth in its earnings per share over the next few years.

"We're expecting S&P 500 earnings per share of $250, $270, and $300 in 2024, 2025, and 2026, respectively. We're a bit more bullish than the industry analysts' consensus this year, but less so in the coming two years. We still see S&P 500 EPS reaching $400 by the end of the decade," Yardeni said.

Finally, Yardeni highlighted that profit margins continue to trend higher to near record highs, suggesting that earnings and economic growth will continue to impress in the second and third quarters.