If ‘herd mentality’ doesn’t cause a meltdown, stock prices could rise 30% over the next two years, market veteran says

• According to market veteran Ed Yardeni, the S&P 500 index could reach 6,500 by 2026.

• The president of Yardeni Research said he is “encouraging” the bull market to continue its steady rise.

• But he warned that stocks risked a “crash” as the AI ​​investor frenzy spirals out of control.

Market veteran Ed Yardeni says stocks could rise as much as 30% over the next two years unless “herd mentality” among investors causes a market meltdown.

Yardeni Research president predicts the S&P 500 index could jump to 6,500 by 2026, implying a 30% rise from the benchmark index’s current level. That’s because the bull market in stocks is likely to continue rising, but there is a slight risk that investors’ enthusiasm will go too far and a stock market “crash” will be followed by a “crash,” he cautioned. did.

Part of this risk is due to investor hype around artificial intelligence, with FOMO around generative AI driving stocks to new highs in 2024.

“Your followers who don’t justify your enthusiasm will hate you. If this sounds like crowd psychology rather than financial analysis, that’s because it is,” Yardeni said in a note Tuesday. .

Signs of a financial crisis are flickering in the less obvious parts of the market. Long-term earnings growth projections by industry analysts have hovered around measurements associated with past melt-ups such as the dot-com bubble. Most extreme are the numbers for the market’s top eight mega-cap tech stocks, which as of the end of January had record long-term earnings growth.

Other analysts warn that big tech stocks are reaching levels of overvaluation that could eventually trigger a market correction. The Magnificent Seven, a group of seven mega-tech companies that soared on Wall Street’s enthusiasm for AI, now accounts for nearly 30% of the S&P 500 and most of the index’s gains last year. .

story continues

A stock market crash is good news for investors, but not before a meltdown inevitably follows, a situation Yardeni has been warning about for months.

“Until that happens, it’s going to be great for our bullish position. It’s always easy to spot a meltup after the fact because a meltup is followed by a meltdown,” he cautioned.

Yardeni said that while he remains concerned about the risk of a melt-up or meltdown, the company is “encouraging” the stock price to continue rising steadily without a melt-up or meltdown. Ta.

But investors remain fairly optimistic about stocks, especially as they factor in the Fed’s ambitious rate cuts this year. According to the latest AAII Investor Sentiment Survey, just over 42% of investors are bullish about the stock market over the next six months. Meanwhile, markets are pricing in a 63% chance that the Fed will cut rates by at least 100 basis points this year, which is higher than central bankers’ official forecasts.

Read the original article on Business Insider