Recent record highs of the S&P 500 suggest that the stock market may be entering a 'melt-up' phase. This phenomenon, characterized by rapid, emotionally-driven increases and increased trading volume, carries potential warning signs.
Ed Yardeni, president of Yardeni Research, believes that the biggest risk currently is the potential for the market to enter a speculative bubble. This warning comes after a period of correction in the market earlier this year.
Several factors are contributing to the current market dynamics, including the deadline for Trump's tax and spending proposals, the expiration of tariff suspensions on several countries, and the release of important employment data.
Despite the concerns, Yardeni sees this bull market as potentially one of the best since the mid-1960s. His team remains committed to its year-end S&P 500 target of 6500 and 10000 by the end of 2029.
After the correction the market experienced between February and early April, the S&P 500 drew support from optimism about tariff agreements, billions of dollars in investments in artificial intelligence companies, and rising forward P/E ratio expectations to record levels.
Yardeni points out that expectations for future corporate earnings peaked in early April, then declined, before rising again. He attributes a large part of the correction to a decline in forward P/E ratio expectations.
Yardeni expects corporate earnings in the second quarter to exceed expectations, as happened in the first quarter, as analysts have stopped lowering earnings forecasts for the remainder of the year.
Since the beginning of the bull market in October 2022, Yardeni and his team have recommended focusing on the information technology, communication services, industrial, and financial sectors, as these sectors have been the best performing. Previously, he recommended the energy sector, but he has since withdrawn that recommendation.
A market melt-up is often driven by a fear of missing out (FOMO), causing investors to rush into the market, further driving up prices. This can create a self-fulfilling prophecy in the short term, but it also increases the risk of a sharp correction when sentiment shifts.
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