Ed Yardeni, a former Federal Reserve economist and veteran Wall Street strategist, believes that the record rise in U.S. stocks is far from over.

Yardeni found solace in the continued beating of earnings expectations, despite growing investor concerns about a narrow market rally concentrated in big tech stocks, stretched valuations and growing signs of an economic slowdown.

Here are a few reasons Yardeni offered in a note to clients last Sunday:

Analysts' forward-looking earnings expectations reached an all-time high last week, suggesting that the market's gains are being supported by what matters most: profits. Analysts are now targeting annual earnings per share for the S&P 500 at $261.74. "This is all based on our assumption that a recession is unlikely in the near term, especially since the Fed will lower rates if necessary to avoid a recession," Yardeni said.

Although the rise in U.S. stocks has been driven primarily by a few companies, Yardeni believes that improvements in earnings breadth should lead to improvements in market breadth. In the week of July 5, the percentage of companies in the S&P 500 with a positive three-month expected earnings change rose to 83%, a bull market high. This suggests that the breadth of the stock market should expand. "

While the S&P 500 trades at about 21 times forward earnings, the median forward P/E for the index is just 17.8. “We believe the broad market is not overvalued and could move higher by the end of the decade on a combination of better earnings and higher valuation multiples,” Yardeni said.

Yardeni expects solid earnings growth for the S&P 500 between now and the end of the decade, with the index generating $250 in earnings per share this year, $270 next year and $400 by the end of the decade.

AI is a big part of Yardeni’s bullish outlook, and he pointed to Corning Inc.’s hiked second-quarter guidance as evidence that the AI ​​boom will spread to other companies. Corning’s shares surged 10% after announcing that generative AI technology was spurring demand for its optical connectivity products.

“This proves that the AI ​​story is real,” Yardeni said. “There are a lot of companies that are benefiting from AI.”

As for whether the U.S. stock market will repeat the Internet bubble of the 1990s through the artificial intelligence narrative, Yardeni believes that some aspects look similar, but if the economy and market deteriorate, the Federal Reserve may eventually lower interest rates.

“When we look at the market and compare it to what happened in the late 1990s, there’s a sense of déjà vu,” Yardeni said. “I think the way to describe it is that we’re in a slow melt-up.”

Melt-up refers to the situation where investors rush to buy in the herd effect because they don’t want to miss out on the stock market’s rising opportunities, which leads to more and more bulls in the market, super-optimistic market sentiment, and the market continues to rise, or even accelerates. This concept was proposed by Yardeni in a blog post in 2016.

“Over the past few weeks, the market has continued to hit new highs even amid disappointing economic indicators,” Yardeni said. “I think that’s because investors have concluded that they don’t have to worry too much about an economic slowdown or even a recession because the Fed would move quickly to lower rates if that became a significant risk.”

The article is forwarded from: Jinshi Data