Ed Yardeni Still Sees S&P 10,000 by 2029. So Why Is He Getting More Cautious?

Ed Yardeni · Yardeni Research

10-year yields are near a peak, but he wants stronger evidence before calling it.

Oil above $90 keeps inflation sticky, so the Fed keeps hiking and short rates push long yields higher. Investors he talks to say 5.25% looks like a good return on a 10-year bond, and he agrees, but he thinks the bond market is not out of the woods. He thinks yields are close to a peak but wants stronger evidence before saying so.

“I think we're getting close to a peak in the bond yields, but I wanna see... I wanna get more of a stronger sense that that's the case.”at 4:31

Ed Yardeni · Yardeni Research

Bond vigilantes are back after years of central-bank suppression; debt priced at zero rates now faces repricing, risking a break.

Central banks held short-term rates near zero and ran quantitative easing from the financial crisis through the pandemic, which suppressed the bond market. Central banks have now stopped QE, so the bond market is freed up. Yardeni argues the bond vigilantes are back and companies and governments that piled up debt while assuming rates would stay near zero now face repricing. He calls this the 'death crisis' scenario in which something could break and trouble could follow.

“...that have accumulated debt ... well, they're getting their comeuppance now, and so something could break. There could be trouble.”at 38:29

Ed Yardeni · Yardeni Research

Demand for Treasuries stays strong even as wealthy clients worry about debt; they still park cash in bills and notes.

Private wealth managers tell Yardeni their wealthy clients are nervous about the government deficit and debt, even though those clients are making a lot of money in stocks. When he asks where they would move money out of stocks, they answer 10-year Treasuries. Yardeni says investors are worried about the debt, yet they still treat Treasuries as the safe place to park money, across 3-month bills, 2-year notes and 10-year notes. He concludes there is still strong demand for government debt, which is part of why he thinks of bond yields as a spectrum.

“So, you know, they're all worried about the debt, but when it comes to, like, having a safe place to park the money... there is still a lot of demand for the government debt.”at 43:21

Justin Carbonneau · Validea

Investors anchor on artificially low rates; today's yields are normal, and people have lost historical perspective.

Carbonneau argues that rates were held artificially low for a long time, so investors anchor on that low level, when a higher rate like 5% is closer to normal. He ties this to housing: low mortgage rates lock owners in, which distorts the market. He says people have lost historical perspective on where rates have usually been. Yardeni partly agrees and says the real abnormality was the 2009-2020 period.

“...interest rates were held artificially low for a very long period of time ... we're, like, anchoring on this artificially low rate when this is, like, kind of, like, normal.”at 45:01

Ed Yardeni · Yardeni Research

Rates are normalising to roughly 4-5%; the 2009-2020 near-zero period was the abnormality, not today's yields.

Yardeni argues that the 'higher for longer' framing is wrong because rates will be 'normal for longer'. The real abnormality was the stretch between the financial crisis and the pandemic. He says bond yields of 4-5%, or a little above, were normal before that period. He does not expect a return to the high yields of the 1970s, but he does think the market is back to normal.

“They know they're not gonna be higher for longer. They're gonna be normal for longer. You know, we're kinda back to normal.”at 45:49

Ed Yardeni · Yardeni Research

Overweight the 'Impressive 493' non-Magnificent Seven S&P stocks, which benefit from AI broadly.

He recommends overweighting the rest of the S&P 500 outside the Magnificent Seven, which he calls the Impressive 493. Those companies will benefit from AI and related technologies. Hyperscalers and other AI companies are competing hard, which should cut their margins and pass benefits to consumers as compute gets cheaper. That makes it hard to pick AI winners, so broad exposure to the other companies is the better way to play the theme.

“We've been recommending overweighting the, we call them the impressive four ninety three. You know, the S and P 500, you got the magnificent seven. So what are the rest?”at 28:22

Ed Yardeni · Yardeni Research

S&P 500 can reach 10,000 by end-2029 if the economy avoids recession and multiples hold near 20x.

The market will discount about $500 of S&P 500 earnings per share by 2029, versus roughly $415 in current analyst estimates. Multiplying $500 by a forward multiple of about 20 gives 10,000 by the end of the decade. The case depends on the base assumption that the economy stays resilient with no recession. Near term he is more cautious: in mid-September he pushed his 8,400 target out to the middle of next year and sees about 7,900 by year-end, because oil and bond-yield pressures could hit valuations. He says he is now rethinking the valuation multiple given AI developments, but he remains bullish on earnings and the market.

“I think the market will be discounting $500 a share for the S and P 500.”at 33:04

Ed Yardeni · Yardeni Research

Yardeni turned cautious in mid-September on short-term oil and inflation risks, unusual for his normally bullish stance.

Yardeni normally leans bullish, so his decision in mid-September to proceed with caution was a deliberate signal. He was concerned about short-term issues, mainly the energy shock. Oil prices and especially diesel could feed inflation and squeeze consumers heading into winter, when heating oil bills rise in the Northeast. The caution is about the near term rather than a change in his longer-run view.

“Well, that's why back in mid September, I sort of proceed with caution, which I think given that I tend to usually tend to be quite quite bullish, I think was a pretty loud message...”at 46:56

Ed Yardeni · Yardeni Research

Oil staying at $90–100 as the Iran war drags on will keep inflation sticky and push the Fed to hike.

Oil fell over the summer after a US-Iran memorandum of understanding, then rose again once it became clear the war was not over and oil-market disruptions continued. Higher-for-longer oil at around $90 to $100 means stickier inflation for longer. That forces the Fed and other central banks to keep raising rates, and higher short rates push bond yields up. That chain is why he advised caution in the near term from mid-September.

“So suddenly, we had a situation where it became clear that the war wasn't over, that there were still disruptions in the oil market.”at 3:22

Ed Yardeni · Yardeni Research

Diesel shortages from refinery outages could feed core inflation quickly through transport and freight costs.

Refineries in Russia and the Middle East are out of commission, and the ones still running are at full capacity, so diesel supply is tight. Diesel is needed for agriculture and commerce. Yardeni expects high diesel prices to pass through to core inflation rather than staying in energy inflation, and to do so rapidly. Retailers face higher freight and fuel charges and pass them on to consumers, so the cost shows up across bills. He says oil prices could fall, but the diesel problem would remain.

“And those diesel prices could get into core inflation, not energy inflation, pretty rapidly.”at 47:48

Ed Yardeni · Yardeni Research

Economy is resilient; no recession, with rolling sector slowdowns rather than a broad downturn.

He has argued since 2020 that the economy is resilient and will keep growing. Past recession calls for 2021 to 2023 failed. The 2022 bear market was a conventional 25% decline with no recession behind it. Recent stresses, including tariffs, the Iran war and bond yields, have not broken the economy. He expects rolling recessions that hit different industries at different times rather than an economy-wide contraction.

“the basic thesis is no recession. The economy is resilient. The economy will continue to grow, maybe with having rolling recessions hitting different industries at different times.”at 5:56

Ed Yardeni · Yardeni Research

Yardeni's base case is a roaring 2020s with 70% subjective probability; 30% covers everything else that could go wrong.

Yardeni's research sets a base case of a roaring 2020s and alternative scenarios, each with a subjective probability. He currently puts 70% on the roaring 2020s and 30% on the other scenarios. The base case rests on his view that the economy is doing well, with productivity helping to bring inflation down.

“So right now, 70% is our subjective probability for the roaring twenties and 30% for the bucket of everything else that could possibly go wrong.”at 57:51

Ed Yardeni · Yardeni Research

Record retiree wealth keeps consumers strong; the economy is G-shaped by generation, not K-shaped.

The largest retiring cohort ever holds record wealth, around $120 trillion of net worth. Retirees benefit from higher interest rates and spend freely on health care and cruises. Many also help younger adults who face affordability problems, so the split is generational rather than K-shaped. Retirement is accelerating because people feel financially secure, which supports consumer spending and the economy.

“So we have the largest group of retiring seniors ever with the most amount of wealth ever, $120,000,000,000,000 of net worth.”at 8:14

Ed Yardeni · Yardeni Research

Rejects the K-shaped economy; boomer-driven G-shaped spending holds up, with savings turning negative by decade's end.

Yardeni rejects the K-shaped idea that the rich are getting richer and the poor poorer. He cites a Moody's study claiming 10% of consumers account for 60% of spending and dismisses it, since Costco, restaurants and airports are busy with ordinary people. He prefers a G-shaped view driven by baby boomers, who have outsized economic weight and are now retiring. Disposable income is flattening while consumption keeps rising. He expects the savings rate to turn negative by the end of the decade, and argues that for retirees balance sheets matter more than income statements, so the spending can continue.

“And the the g shape is, is really not even a theory. It's just just an observation of, demographics that the baby boomers have always had an outsized impact on the economy, and they continue to do so now that they're retiring.”at 1:01:23

Jack Forehand · Validea Capital Management

Unlike dot-com fiber overbuild, AI capacity can't meet demand, so AI may be less bubble-prone.

In the dot-com boom, much fiber was built well ahead of demand. Today the buildout is struggling to keep up with demand, which he thinks makes AI less likely to become a bubble than the dot-com era was. Ed Yardeni agreed with him.

“in the [dot-com] boom, a lot of this fiber was built out in advance of demand, and now we can't even meet demand. It seems like that might be a case for this turning less into a bubble maybe than that did.”at 27:28

Ed Yardeni · Yardeni Research

AI compute demand won't halt; firms are catching up to demand, so no dot-com-style bubble.

He says companies are trying to catch up with demand for compute rather than overbuilding ahead of it. Data processing keeps getting faster and cheaper, which generates more data to process, so he sees no reason demand would suddenly stop short of a civilization-level event. He treats the endless demand for compute as the core of his thesis and does not see the buildout as a bubble.

“They're trying to catch up with demand. And, again, somebody has to tell me why demand is suddenly gonna come to a screeching halt”at 27:45

Ed Yardeni · Yardeni Research

Fed has shifted from expected cuts to likely further tightening as oil and growth lift the neutral rate.

At the start of the year the Fed expected to lower rates toward neutral. The war, a new Fed chair and higher oil changed that. Oil pushed inflation up, and the Fed is now talking about a couple more hikes. The Fed chair described the recent hike as reducing accommodation, which suggests the neutral rate is higher than assumed. The economy can perform well at higher rates, so the tightening is a sign of strength rather than a policy error.

“So we go from we're probably gonna need to ease to we're probably gonna have to continue to tighten.”at 36:18

Ed Yardeni · Yardeni Research

Fed under Warsh is reversing last year's cuts; Yardeni expects two more hikes and says rates should track the two-year yield.

Yardeni argues the 2024 cuts were a mistake: the economy was stronger than assumed, inflation was not yet at 2%, and the bond yield rose about 100 basis points after the cuts. Last year's three further cuts had a similar result. He says the Fed is now reversing at least last year's cut. Warsh sounded hawkish in June and July, and the Fed raised rates by a quarter point in September, unanimously, partly because of fears that high oil prices would make inflation stickier. Yardeni says Warsh wants markets to guide policy. He proposes a rule that raises the fed funds rate by a quarter point whenever the two-year yield sits 50 basis points above it, arguing the two-year predicts the policy rate well.

“...And now I think the Fed is sort of in the process of reversing at least last year's rate cut. So I think there's two more to go.”at 51:44

Ed Yardeni · Yardeni Research

Earnings-led bull market: profits are rising faster than valuation multiples are falling, so the rally is healthier.

Earnings have been surprisingly strong this year, which he calls FMO (fabulous earnings momentum), as opposed to FOMO-driven chasing. Investors have not been bidding up prices. Valuation multiples have fallen, but by less than earnings have risen, so the market has hit new highs on earnings growth rather than multiple expansion. He sees this as a healthier driver of a bull market than FOMO-driven melt-ups and expects further upside earnings surprises.

“they haven't been chasing earnings up and the valuation multiples have actually been going down, but not as much as earnings have been going up.”at 2:24

Ed Yardeni · Yardeni Research

AI will start a productivity boom that offsets lost experience as boomers retire, though not yet visible.

He sees AI as evolutionary, part of the digital revolution. It turns stored data into useful insights quickly and cheaply, which he calls a fourth factor of production alongside land, labor and capital. Earlier software waves like Word and Excel gave a productivity surge that faded. He expects AI to start another productivity boom that has not yet kicked in. That matters because retiring boomers are taking experienced skilled workers out of the labor market, and technology has to augment the workers who remain.

“Now I think we're in the midst of a... Another great productivity boom led by AI. I don't think it's actually kicked in yet.”at 16:50

Ed Yardeni · Yardeni Research

AI buildout is forcing long-overdue grid upgrades, since the US electric power grid is woefully obsolete.

The AI buildout is pushing the US to do things it should have done long ago. The electric power grid is woefully obsolete, and the country is improving it very rapidly because of the demand that AI creates.

“the AI build out is making us do some things we should have done a long time ago, like our electric power grid is, you know, woefully obsolete”at 21:19

Ed Yardeni · Yardeni Research

Tariffs are not causing a Smoot-Hawley-style collapse; the economy is absorbing them.

He does not expect a Smoot-Hawley-style tariff shock. Tariffs were imposed last year and are still in place, but they have not taken the economy down. He notes that the 1930s crash was linked to Smoot-Hawley. He says a stock market calamity or some other crisis is a more plausible threat to the consumer than tariffs.

“I don't think we're gonna get Smoot Hawley tariff. We had tariffs last year, still do, and they're really not taking the economy down.”at 24:27

Ed Yardeni · Yardeni Research

US fiscal path could push yields Greece-style higher, though a bond-market scare might force politicians to fix deficits.

Yardeni cites Ray Dalio's call that the US must fix its fiscal house. He frames the nightmare case as Dalio being right and bond yields rising without limit, with the country starting to resemble Greece in 2010, when Greek yields reached 40%. He sees a happier outcome in which a few months of market pressure push politicians to change course, as in Greece, where yields now sit below France's. He flags the midterms as a risk: with partisanship rising, a fiscal fix could fail and the debt crisis could spiral.

“And a lot of it is fiscally related... I mean, the nightmare scenario is that he's right, and bond yields keep going up and up and up.”at 38:29

Ed Yardeni · Yardeni Research

Yardeni no longer recommends overweighting US stocks; the US is too large a share of global markets.

Yardeni recommended overweighting the US relative to the rest of the world from 2010 until last year, when that call stopped working and global stocks outperformed. At the end of last year the US made up 65% of the MSCI World/ACWI market cap, so he no longer felt comfortable recommending an overweight in something that large. He told clients to go global. The shift worked for a few weeks early this year, but when the war raised fears that oil shocks would hurt the rest of the world more than the US, the gap closed. Since then, going global and staying home have performed about the same.

“The US, at the end of last year, accounted for 65% of the market cap of the MSCI Global... I no longer feel comfortable telling you to overweight something that's already 65% of the index.”at 48:58