Stocks could face a meltdown as the bubble of companies profiting from the excitement of AI bursts, Ed Yardeni said.
The current equity bull market is unusual because it typically starts when company valuations are low, he said.
“The problem with meltdowns is that they are almost always invariably followed by meltdowns.”
The stock market could crash as the bubble of overvalued mega-cap stocks begins to burst, according to market veteran Ed Yardeni.
In an interview with Fox Business on Monday, the chairman of Yardeni Research warned of a potential stock fallout, referring to his previous predictions that the artificial intelligence stock craze was creating the market’s “mother of all mergers”.
This is already visible in the outperformance of eight mega-cap stocks this year, with Nvidia, Alphabet, Microsoft and other tech titans soaring as they ride the wave of excitement for AI.
Yardeni predicted that stocks will continue to rise through 2023 into next year, potentially taking the S&P 500 to 4,600 by the end of the year. But if stocks rise too quickly, it could spell trouble for the market as the bubble of overvalued names bursts.
“The problem with meltdowns is that they are almost always followed invariably by meltdowns,” Yardeni warned.
He noted that the current bull market in equities is unusual because it typically begins when company valuations are low. When stocks hit a low of 3,600 in October last year, stocks were still quite expensive, Yardeni noted, with the S&P 500 price-earnings ratio hovering around 15.
This ratio is now around 18, thanks in large part to the success of the eight mega-cap companies.
Yardeni’s warning comes as other Wall Street strategists sounded the alarm of an upcoming earnings slump hitting the market, as companies continue to battle high inflation and high interest rates . High rates also risk tipping the economy into recession, experts warn, which could also weigh on stocks.
For his part, Yardeni previously predicted that the United States had a 60% chance of avoiding a recession, as the economy has so far resisted aggressive interest rate hikes.
He is also more bullish on earnings, saying S&P 500 companies are expected to post year-end earnings of $225 a share, above Wall Street’s average forecast of $206.
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