Renowned strategist Ed Yardeni: A significant rate cut reminiscent of 1995, US stocks will soar, but inflation may reappear

The Federal Reserve made an aggressive 50 basis point rate cut last week, and the market is eagerly anticipating whether the prosperity of 1995 will really return.

According to Bloomberg, on Monday, Ed Yardeni, the founder of Yardeni Research Inc., a well-known strategist on Wall Street, stated that due to the significant rate cut by the Federal Reserve last week, the U.S. stock market may soar to new highs, but if the central bank chairman is not cautious, it could also lead to a resurgence of inflation. He also pointed out:

"The latest policy decision has increased the likelihood of stock prices 'melting up' from 20% to 30%, a phenomenon similar to the S&P 500 index soaring 220% from 1995 to the end of the last century during the dot-com bubble."

He believes that the probability of a bull market is 80%, while the possibility of market turmoil similar to the 1970s is 20%, when global stock markets were in turmoil due to inflation and geopolitical tensions.

If the economy starts to overheat, there are broader risks. Yardeni warned:

"If they let the economy overheat and create a bubble in the stock market, they will bring some problems. The Federal Reserve has ignored the upcoming U.S. presidential election, both candidates have proposed policies that could trigger inflation."

At the same time, policymakers reiterated their confidence in the decision to significantly cut rates to initiate an easing cycle. Minneapolis Fed President Neel Kashkari said on Monday that he supported a 50 basis point rate cut, but he expects smaller 25 basis point cuts at the November and December meetings.

Atlanta Fed President Raphael Bostic stated that with the risks of managing inflation and employment becoming more balanced, last week's significant rate cut will help bring rates closer to a neutral level.

The U.S. stock market started the month a bit difficult, with the S&P 500 index falling over 4% in the first week. However, since then, investors' confidence in achieving an economic soft landing has been continuously strengthening, making the index poised to deliver its best September performance since 2019, despite historically being the worst month for the index.

Yardeni tends to believe that the market is in a new "roaring 2020s" era, characterized by productivity, economic growth, and substantial stock returns. However, the probability of this scenario occurring has decreased from 60% to 50%.

Yardeni is one of the most optimistic forecasters on Wall Street. According to the latest survey, he has set a target price of 5800 points for the S&P 500 index, in line with other optimistic forecasts. The S&P 500 index has risen by over 20% so far this year, and many strategists have also raised their expectations. BMO Capital Markets has the highest forecast for it, with a target price of 6100 points; Evercore ISI expects the index to close at 6000 points by the end of the year On the other hand, Barry Bannister, Chief Equity Strategist at Stifel Nicolaus & Co., warned last week:

"The market is in the 'Groundhog Day (Spring)' of the Internet bubble, and the stock market may plummet by 13% by the fourth quarter."