- The stock market will continue to hit record highs driven by reasonable valuations and continued earnings growth, according to Ed Yardeni.
- He highlighted AI as a reason to remain bullish on stocks as the benefits spread to more companies.
The record rally in the stock market isn't close to being over, according to market veteran Ed Yardeni.
While investor concerns have been growing about a narrow market rally concentrated in mega-cap technology stocks, stretched valuations, and growing signs of an economic slowdown, Yardeni finds solace in the fact that earnings continue to impress.
"These are all legitimate concerns. Here are a few reasons to be somewhat less concerned," Yardeni told clients in a note on Sunday.
Forward earnings expectations rise
Analysts' forward earnings expectations hit a record high last week, illustrating that the market rally is supported by what matters the most: profits.
Analysts now put the S&P 500's annualized earnings per share at $261.74.
"This all assumes, as we do, that a recession is unlikely anytime soon, especially since the Fed will lower interest rates to avert one if necessary," Yardeni said.
Market breadth will improve
While the stock market rally has been driven mostly by a concentrated handful of companies, improving earnings breadth should lead to improving market breadth, according to Yardeni.
"The percent of S&P 500 companies with positive three-month percent changes in forward earnings rose to a bull-market high of 83% during the July 5 week. That argues for a broadening of the stock market's breadth," Yardeni explained.
Valuations are not stretched
While the S&P 500 has a high forward price-to-earnings multiple of about 21x, the index's median forward price-to-earnings multiple is just 17.8x.
"The broad market is not overvalued, in our opinion and could go up on a combination of better earnings and a higher valuation multiple through the end of the decade," Yardeni said.
Yardeni told CNBC in an interview on Monday that he expects the S&P 500 will print solid earnings growth between now and the end of the decade, with the index printing $250 earnings per share this year, $270 next year, and up to $400 by the end of the decade.
AI is a big part of Yardeni's bullish outlook, and he pointed to raised second-quarter guidance from Corning as evidence that the AI boom is going to spread to other companies.
Corning soared 10% on Monday after it said generative AI technologies sparked strong demand for its optical connectivity products, which are a key ingredient for data centers.
"That just demonstrated that the AI story is legitimate. There's a lot of companies that are benefiting from AI," Yardeni said.
And as to whether the stock market is repeating the 1990's dot-com boom via the AI growth story, Yardeni said some things look similar, but the Fed could ultimately lower interest rates if the economy and markets turn south.
"There's a bit of deja-vu all over again when we look at the market and compare it to what happened in the late 1990s. I think the way I would describe things is we're in a slow-motion melt-up," Yardeni said.
"The market for the past few weeks has continued to march higher to new record highs and it's done it on disappointing economic indicators because I think investors have concluded that let's not worry too much about the economy slowing or even a recession because if that were to become a significant risk the Fed will move pretty quickly to lower interest rates," Yardeni said.