During a CNBC interview, Yardeni said the backdrop remains supportive for stocks, even as investors keep an eye on yields, oil, inflation and the Federal Reserve.
- Yardeni said the 5.2% level on bond yields is not high enough to “kneecap” the stock market or the broader economy.
- However, he identified 6% yield as the level that would make investors considerably more cautious.
- The economist highlighted that the typical scenario for these cracks to develop involves higher rates putting pressure on financial markets, potentially triggering a credit crunch that could then lead to a recession.
Ed Yardeni, President of Yardeni Research, on Friday warned that the momentum in equities could face headwinds if bond yields soar to 6%.
During an interview with CNBC, the economist said the backdrop remains supportive for equities, even as investors watch bond yields, oil prices, inflation and the Federal Reserve closely for signs that the market could come under pressure.
Yardeni Says 6% Bond Yield Would Raise Alarm
Yardeni said the 5.2% level on bond yields is not high enough to “kneecap” the stock market or the broader economy. However, he identified a level that would make investors considerably more cautious.
“We’d all start to get concerned if we got as high as six,” Yardeni said, pointing to the possibility that higher interest rates could lead to a crack emerging in the credit markets eventually.
The economist highlighted that the typical scenario for these cracks to develop involves higher rates putting pressure on financial markets, potentially triggering a credit crunch that could then lead to a recession.
However, he does not believe the economy is in that kind of business-cycle environment currently. He also highlighted nominal Gross Domestic Product (GDP) growth of 6.6% year over year in the second quarter (Q2), arguing that the economy should remain on solid footing as long as bond yields stay below the pace of nominal economic growth.
The 10-Year Treasury yield edged up by 0.3 basis points to hover at 5.165%, while the 30-Year bond yield rose nearly three basis points to hover at 5.49% at the time of writing.
The iShares 20+ Year Treasury Bond ETF (TLT) rose 0.08% in Friday’s after-hours session, while the iShares 7-10 Year Treasury Bond ETF (IEF) edged up by 0.02%.
Why Yardeni Remains Bullish On Stocks
Despite the rise in yields, Yardeni said the fundamental backdrop for equities remains strong. He pointed to remarkably strong economic indicators and continued earnings momentum as key reasons for his bullish outlook.
According to Yardeni, earnings were “absolutely fabulous” in the first half of the year, and he expects that momentum to continue into the second half.
“This has definitely been an earnings-led bull market,” he said.
Yardeni also noted an important development for valuations, which is that stocks have actually become cheaper since the beginning of the year because earnings have grown faster than the S&P 500.
The economist said that this leaves valuation multiples as an area investors need to watch in the near term, even though he maintains a positive longer-term view on earnings.
Yardeni Says $100 Oil, Inflation And The Fed Are Still Risks
Yardeni said the bond market’s concerns extend beyond oil, pointing to the federal deficit and the amount of AI-related corporate debt as additional factors.
Still, the rebound in oil prices toward $100 a barrel had been a major concern for markets. Yardeni argued that inflation could prove to be stickier if oil prices remain elevated for longer, potentially leaving the Federal Reserve with more work to do on interest rates to combat higher inflation, which could eventually put upward pressure on Treasury yields.
Yardeni said those concerns had largely played out in the market by mid-September, but the situation remains fluid.
During the after-hours session, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, rose 0.09%; the Invesco QQQ Trust ETF (QQQ) gained 0.12%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.04%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘extremely bullish’ territory.
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