Wall Street Big Shots: Fed Rate Cut Increases the Probability of "Fully Melt-Up" in US Stocks

Wall Street strategist Ed Yardeni said that due to the Federal Reserve's aggressive 50 basis point rate cut last week, US stocks may soar to new highs, but if the Fed is not cautious, this could also lead to a resurgence of inflation.

In Yardeni's view, the Fed's latest policy decision has increased the probability of a "melt-up" in US stocks from 20% to 30%. A melt-up refers to a market scenario where late-arriving investors enter the market with momentum, causing a sharp upward trend, 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 there is an 80% chance of a bull market in US stocks, while also retaining a 20% chance of a collapse similar to the 1970s when global stock markets fluctuated due to inflation and geopolitical tensions.

However, if the situation starts to overheat, the stock market will face greater risks.

The founder of Yardeni Research Inc. said in an interview on Monday, "If they (Fed policymakers) overheat the economy and create a bubble in the stock market, some problems will arise." He added that the Fed has overlooked the upcoming US presidential election, where both candidates have proposed policies that could trigger inflation.

At the time Yardeni made these remarks, Fed policymakers reiterated their confidence in the decision to start a loose cycle with a significant rate cut.

Minneapolis Fed President Kashkari said on Monday that he supported a 50 basis point rate cut at this month's meeting, but he expects rate cuts of 25 basis points at the November and December meetings. Meanwhile, Atlanta Fed President Bostic said that last week's significant rate cut would help bring rates closer to a neutral level as risks related to managing inflation and employment become more balanced.

The stock market had a tough start this month, with the S&P 500 index falling over 4% in the first week. However, since then, due to increased investor confidence in the Fed's ability to achieve a soft landing, the stock benchmark index is expected to have its best September performance since 2019, a month historically known as the worst performing month for the index.

Yardeni reiterated his view that the market is in a new "Roaring Twenties" era characterized by productivity, growth, and substantial stock returns. However, he said that the likelihood of this scenario occurring has decreased from 60% to 50%.

According to Bloomberg's latest survey of strategists, this forecaster, who is usually one of Wall Street's most bullish predictors, has set a year-end target of 5800 points for the S&P 500 index. This once jaw-dropping forecast now seems to align with many optimistic peers. The Wall Street strategist has steadily raised the target price for the S&P 500 index this year to keep up with its rapid 20% rise BMO Capital Markets has the highest year-end target price for the S&P 500 index at 6100 points, while 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 that the market is on the edge of an internet bubble and suggested that stocks could plummet by as much as 13% by the fourth quarter