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The current rally in stocks is poised to become the most hated bull market in history, according to market veteran Ed Yardeni.
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He outlined 4 reasons why investors are not fully buying into the current stock market rally.
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“The most despicable thing is that the bull has the nerve to charge when almost everyone agrees that a recession is coming any day,” Yardeni said.
The current rally in equities that began in mid-October could become one of the most hated bull markets in history, according to market veteran Ed Yardeni.
The S&P 500 jumped 21% from its Oct. 12 low, while the Nasdaq 100 rose nearly 40%. Such a strong recovery came in the face of high inflation, high interest rates and growing fears of a possible recession.
This has led many investors to believe that the current rally in stocks is not a new bull market, but rather a bear rally.
Yardeni disagrees and instead highlighted in a weekend note four reasons why the current rally in equities is likely to become the most hated bull market in history.
1. “It started with historically high P/Es.”
Yardeni pointed out that the bullish rally in equities started with high valuations, not low. In the fourth quarter of 2022, the S&P 500 traded at a forward price-to-earnings ratio of around 18x, which is above its 25-year average of 16.8x.
“In the past, valuations offered attractive opportunities at the end of bear markets,” Yardeni explained. With valuations failing to reach attractive levels during this recent bear market, many investors likely missed buying the lows as they waited for valuations to fall.
2. An impending recession.
Since the stock market hit a low in mid-October, headlines have multiplied about the potential for an impending recession. And yet, despite this fear, the stock market continued to rise. Warnings from US CEOs and business leaders have done nothing to depress stock prices.
“The most despicable thing is that the bull has the nerve to charge when almost everyone agrees that a recession is coming any day,” Yardeni said.
3. The banking crisis has not derailed 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 went bankrupt within two months. The bank failures rivaled the bank failures of the Great Financial Crisis of 2008, with more than $500 billion in assets held at the three failed regional banks, and yet stocks continued to rise.
“What’s particularly disconcerting to the crowd is that the S&P 500 has continued to rally since March 8, when the banking crisis began,” Yardeni said.
4. Lack of participation among small stocks.
Finally, investors are taking issue with the fact that the current stock market rally is being driven primarily 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’re seeing that the ratio between the equally-weighted and market-cap-weighted S&P 500 has plunged…Such bad magnitude is not characteristic of young bull markets,” Yardeni said.
But Yardeni pointed out that there are plenty of stocks outside of mega-cap tech that have hit record highs in recent weeks, and that there is strong momentum in positive earnings forecast revisions.
Ultimately, Yardeni believes in the current bullish rally in the stock market, particularly because the advent of artificial intelligence could fuel a roaring 2020 boom.
“I think we’re just in the early stages of actually integrating artificial intelligence,” Yardeni told CNBC on Tuesday. “With robotics, with automation, it all really adds up to increasing the productivity of the brain. The previous productivity booms, we’ve increased the productivity of the brauns, of the horses. And so I think that’s is a radically different productivity boom that suggests to me that all companies are tech companies.”
Read the original article on Business Insider