A market veteran says a 1990s-style stock market crash could occur after the S&P 500 index hits a new all-time high.

• According to Ed Yardeni, the stock market could experience a crash similar to the one seen in the 1990s.

• Yardeni said a new scenario is possible after the S&P 500 hit a record high last week.

• Federal Reserve interest rate cuts and high tech stocks will fuel the financial collapse.

Market veteran Ed Yardeni says a 1990s-style stock market crash is possible after the S&P 500 hit a record high last week.

Yardeni outlined the melt-up scenario in a note to clients on Sunday, estimating a 20% chance as investors continue to buy up tech stocks.

“This is a new scenario that we haven’t discussed before,” Yardeni said. “In this scenario, the Fed is concerned that inflation is below 2.0% and that the economy remains strong. We will respond by aggressively cutting interest rates.”

In such a scenario, Yardeni believes the stock market will respond by staging a crash, led by tech stocks, but that won’t last forever and could have painful consequences for investors. expensive.

“As asset inflation shows signs of turning into new price inflation, the resulting valuation bubble will burst if the Fed is forced to raise rates,” Yardeni said.

The Fed itself expects three rate cuts this year, but market expectations are more dovish, currently pricing in about six rate cuts, according to the CME Fed Watch Tool.

As for how much room tech stocks would have to rise in this scenario, Yardeni said valuations today are relatively calm compared to the dot-com peak in 2000. He emphasized that he could see it.

The technology sector currently trades at a forward price-to-earnings ratio of 26.2 times, nearly half the 50 times forward price-earnings ratio recorded by the sector in 2000.

“In this scenario, irrational exuberance will return, and while it lasts, it will be a lot of fun for stock investors,” Yardeni said.

While this melt-up scenario is a possibility, Yardeni said the most likely scenario for the stock market is a roaring 2020-style scenario that continues for several years as a surge in productivity growth keeps inflation in check. I still believe it’s a boom. Yardeni believes the probability of this scenario unfolding is 60%.

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