Worried trader
Richard Drew/Associated Press
The current rally in stocks is poised to become the most hated bull market in history, according to market veteran Ed Yardeni.He highlighted 4 reasons why investors are not fully buying in to the current stock rally.“Most despicable is that the bull has the chutzpah to charge ahead when almost everyone agrees a recession is coming any day now,” Yardeni said.
The current rally in stocks that started in mid-October could become one of the most hated bull markets in history, according to market veteran Ed Yardeni.
The S&P 500 has surged 21% from its October 12 low, while the Nasdaq 100 is up nearly 40%. Such a strong rally has come in the face of high inflation, high interest rates, and growing concerns of a potential recession.
That’s led many investors to believe that the current rally in stocks isn’t a new bull market, but rather a bear market rally.
Yardeni disagrees, and instead highlighted in a note over the weekend four reasons why the current rally in stocks is likely to become the most hated bull market in history.
1. “It started with historically high P/Es.”
Yardeni highlighted that the bull rally in stocks started with valuations high, not low. In the fourth-quarter of 2022, the S&P 500 traded at a forward price-to-earnings ratio of about 18x, which is above its 25-year average of 16.8x.
“In the past, valuations offered compelling opportunities at the end of bear markets,” Yardeni explained. With valuations not bottoming to attractive levels during this recent bear market, many investors likely missed out on buying the lows as they waited for valuations to decline.
2. An imminent recession.
Since the stock market bottomed in mid-October, headlines have been ramping up about the potential of an imminent recession. And yet, despite that fear, the stock market kept rising. Warnings from American CEOs and top business leaders did nothing to send stock prices lower.
“Most despicable is that the bull has the chutzpah to charge ahead when almost everyone agrees a recession is coming any day now,” Yardeni said.
3. The banking crisis didn’t derail stocks.
Another risk that failed to derail the current stock market rally was the regional banking crisis that led to the downfall of three major banks. Silicon Valley Bank, Signature Bank, and First Republic Bank all failed within two months. The bank failures rivaled the bank failures of the 2008 Great Financial Crisis, with more than $500 billion in assets held at the three failed regional banks, and yet stocks kept rising.
“Especially disconcerting to the crowd is that the S&P 500 has continued to rally since March 8, when the banking crisis started,” Yardeni said.
4. Lack of participation among smaller stocks.
Finally, investors are taking issue with the fact that the current stock market rally is mostly being fueled by mega-cap tech stocks, leading to a lack of participation among the hundreds of smaller companies that make up the S&P 500.
“They observe that the ratio of the equal-weighted to market-cap-weighted S&P 500 has plunged… Such bad breadth is not the hallmark of young bull markets,” Yardeni said.
But Yardeni pointed out that there are plenty of stocks aside from mega-cap tech that have jumped to record highs in recent weeks, and that there’s strong breadth in positive earnings forecast revisions.
Ultimately, Yardeni does believe in the stock market’s current bull rally, especially because the advent of artificial intelligence could fuel a Roaring 2020’s boom.
“I think we’re just in the early phases of really integrating artificial intelligence,” Yardeni told CNBC on Tuesday. “With robotics, with automation, this really all adds up to increasing the productivity of the brain. Previous productivity booms we increased the productivity of braun, horsepowers. And so I think this is a radically different productivity boom that suggests to me that all companies are technology companies.”