Yardeni Research President Ed Yardeni recently pruned his "best-case" S&P 500 forecast for this year to 6,400 from 7,000, citing stretched stock valuations and uncertainty over U.S. tariff policy. At the same time, the market strategist expects the index to reach all-time highs in the year's second half.
The S&P 500 stood at roughly 5,698 during trading Monday, leaving plenty of room for growth to Yardeni's new, lower forecast for the year. It's conceivable that the recent market downturn represents a bottom, he said.
"It obviously relates to valuation. Valuation has been stretched, everybody knows that, but the outlook for the economy was pretty good until we got hit by this tariff issue and it looks like it’s not going to go away anytime soon," Yardeni said on CNBC's "Squawk Box" on Monday, following his forecast cut last week.
Yardeni's new worst-case scenario for the S&P 500 this year is 5,800. He lowered his best-case forecast for 2026 to 7,200 from 8,000, and his worst-case scenario for next year is 6,500.
Valuations for the Magnificent 7 mega-cap stocks have fallen to a forward price-to-earnings multiple of 25 from 30, and for the S&P 500 overall they've slid to 20 from 22, Yardeni noted.
“So I have adjusted for valuation,” he said.
The U.S. economy should be resilient, as it has been for past three years, and if that continues, earnings should hold up as well, even as valuations sink, he said. Yardeni has raised his view on recession chances to 35% from 20%.
"The tariff issue is unnerving consumers,” and prices aren't expected to come down, the economist said.
As the year continues, economic and earnings resilience should become apparent, Yardeni suggested.
“I think the second half is when the market moves ahead to new record highs," he said.
In a note issued Sunday night, Yardeni said, "We aren't convinced that the correction is over despite Friday's rally and extremely bearish sentiment readings, which tend to be bullish from a contrarian perspective. In the past, such readings often elicited a Fed-Put easing response. That's not likely on Wednesday after the FOMC (the Federal Reserve's rate-setting committee) meets and Fed Chair Jerome Powell holds his presser. He is likely to reiterate that the Fed is in no hurry to lower interest rates."
He added: "We will feel better about calling a stock market bottom when the market is no longer 'tarrified' by Trump's tariff threats and actions. It might bottom after April 2, when Trump imposes reciprocal tariffs all around the world, if they lead to tariff-reduction negotiations."
He suggested on CNBC that investors wouldn't want to buy when on April 2, there will be “a slew of reciprocal tariffs and the president will be talking about them. I’ve observed of late that any day where the president doesn’t talk about tariffs is a good day for the market.”
He added that it would be "very bullish" if the president is using tariffs as a negotiating tool to ultimately lower tariffs but "delusional" to think that new tariffs would raise revenue to replace lowered income or corporate taxes.
Photo: Bloomberg
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