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  • Stocks could tank after an ill-advised ‘melt-up’ if the Fed cuts rates to avoid recession

    Stocks could tank after an ill-advised ‘melt-up’ if the Fed cuts rates to avoid recession

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    • There’s a growing risk of a stock market melt-up, according to market veteran Ed Yardeni.

    • Yardeni said the return of the “Fed Put” means stocks could soar on the anticipation and realization of interest rate cuts.

    • But stock market melt-ups are rarely sustainable and are often followed by a painful decline.

    There’s a growing risk that the Federal Reserve could spark a stock market melt-up, according to market veteran and investment strategist Ed Yardeni.

    The “Fed Put,” or the idea that the Fed will save the stock market with interest rate cuts amid any sign of economic weakness, has returned to markets after Fed Chairman Jerome Powell indicated last month that the next interest rate decision is likely to be a cut, not a hike.

    “Investors’ expectation that the Fed would nip a recession in the bud by easing means that the Fed Put is back,” Yardeni told clients in a note on Tuesday. “Its return reduces the risk of a recession and a bear market. It increases the risk of a melt-up in the stock market.”

    Ultimately, investors’ anticipation of monetary easing by the Fed via interest rate cuts, whether realized or not, could unleash a new wave of animal spirits that catapults the stock market a lot higher from here.

    Yardeni himself sees the S&P 500 rising to record highs by the end of the year at 5,400, and has also suggested that the index could soar as much as 25% to 6,500 through 2026.

    “We don’t expect any recession this year that the Fed would have to address by easing. But since some investors think that may happen, the Fed Put is back. With it comes increased risk of a stock market meltup,” Yardeni said.

    Aiding Yardeni’s bullish outlook for stocks, and the potential risk of an unsustainable stock market boom, is the fact that earnings expectations continue to rise following better-than-expected first-quarter results.

    Wall Street analysts now expect S&P 500 earnings growth of 10.1% this year, accelerating to 13.9% in 2025 and 11.8% in 2026, which represents an increasingly bullish outlook for corporate profits.

    “As we’ve often observed in the past, if the odds of a recession are low, then S&P 500 forward earnings is a very good leading indicator of actual earnings,” Yardeni explained. And rising earnings are what ultimately drive stock prices higher in the long-term.

    But the growing risk of a stock market melt-up coincides with the risk of a stock market sell-off, as melt-ups are rarely sustainable and are usually quickly followed by a swift and painful decline.

    For investors, the question is whether or not a potential stock market melt-up and subsequent decline will happen at prices a lot higher or lower from current levels.

    Read the original article on Business Insider

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  • Stocks are entering the next leg of the bull market and the S&P 500 can hit a record-high of 5,000 by end of 2024, veteran strategist says

    Stocks are entering the next leg of the bull market and the S&P 500 can hit a record-high of 5,000 by end of 2024, veteran strategist says

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    The bull market in stocks could even run on until 2026 if business and fiscal conditions align, one market veteran says.Reuters / Paulo Whitaker

    • The S&P 500 could be on track to notch a new record next year, according to market vet Phil Orlando.

    • The Federated Hermes chief stock strategist said the Fed was likely done with its rate hikes.

    • That means the second leg of the bull market has room to run on into 2024, he predicted.

    The bull market in stocks has more room to run, and it could take the S&P 500 to a new high by the end of next year, one market veteran says.

    That’s the thesis of Phil Orlando, the chief equity strategist at Federated Hermes. Orlando sees the S&P 500 surging to 5,000 by the end of 2024, representing an upside of around 10% from the benchmark index’s current levels.

    “We think that stocks are going to grind higher. They’ve gone from 4100 to 4500. And we think that’s a trend that’s got legs,” Orlando said in an interview with Bloomberg Surveillance on Monday.

    His optimism comes largely because he thinks the Fed is done hiking interest rates. Central bankers have already raised rates 525 basis points over the last 20 months to lower inflation, a move that hammered stocks in 2022.

    But inflation has cooled dramatically from its highs last summer. Prices rose just 3.2% year-per-year in October, lower than the expected 3.3% increase, the Consumer Price Index report showed last week.

    The case for the Fed to stop interest rate hikes is also supported by the recent surge in bond yields, with the yield on the 10-year US Treasury briefly surpassing 5% last month. Higher bond yields influence other interest rates in the economy, which have also helped tighten financial conditions.

    “The bond market’s done the heavy lifting for [the Fed] since the last Fed rate hike in July,” Orlando said on Bloomberg. “That gives the Fed the luxury, in my view, to step back and say, you know what, we don’t have to hike any more. We can just sit here on the sidelines for the next year and allow the gradual slowing of inflation to occur.”

    Markets are now pricing in an 81% chance the Fed could cut rates in the first half of next year, according to the CME FedWatch tool.

    Equities have been rallying in November as investors assess the more positive outlook for rates. The S&P 500 has climbed 7% over the past month, trading around 4,535 on Monday. That rally could even continue into 2025 and 2026, Orlando said, especially if the upcoming election cycle encourages more market-friendly business and fiscal policies.

    Read the original article on Business Insider

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