Since the pandemic, the stock market has proven to be remarkably resilient. Despite all the events of the past few years — and a 25.4% bear market drawdown in 2022 — the benchmark S&P 500 (^GSPC +0.77%) is up 235% since its pandemic low in March 2020 and roughly 110% since the current bull market began in October 2022.
In one camp, many investors have been waiting for a recession or a market downturn following the pandemic, higher interest rates, and all the exuberance around artificial intelligence (AI), which has led to exorbitant capital expenditures at major tech companies and high valuations for many AI players. Another cohort believes the consumer is strong and this bull market has more room to run.
Recently, both renowned economist Ed Yardeni and Michael Burry of The Big Short fame made big market calls. One thinks the S&P 500 is heading to 8,250, while the other believes a situation akin to a “bloody car crash” is not far off.
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Yardeni: Earnings growth continues to accelerate
Yardeni had served as the chief investment officer at Prudential Equity Group, C.J. Lawrence, and Deutsche Bank before launching Yardeni Research in 2007. His market predictions in recent years have often been bullish, but he is not afraid to recommend pulling back when he sees red flags.
Recently, Yardeni raised his year-end price target for the S&P 500 from 7,700 to 8,250, the highest call on Wall Street. With the market around 7,500 at this writing, it’s not a total surprise to see strategists lifting their price targets.
It’s true the market has fared phenomenally well given what has happened this year, from concerns about AI and private credit to the Iran war, which has sent oil prices to over $100 per barrel on numerous occasions.
In a research note, Yardeni said his call boils down to spectacular earnings growth that has only continued to accelerate. Yardeni and his firm are now modeling S&P 500 earnings per share of $330 this year and $375 in 2027, up from his previous estimates of $310 and $350, respectively.
“We’ve never seen consensus earnings expectations rise so quickly for the current and coming years as they have in recent months,” Yardeni wrote, adding that he believes the economy will remain resilient. “The result has been an earnings-led melt-up in the stock market.”
Yardeni also noted that other Street strategists have higher projected earnings per share (EPS) than he does. With an $8,250 price target and $330 projected EPS, Yardeni is assigning the S&P 500 a 25 price-to-earnings (P/E) ratio. That’s certainly elevated relative to the market’s historical multiples but, because of the projected earnings growth, below some estimates of its current valuation.
Burry: Too good to be true
Burry rose to fame for betting that mortgage bonds would effectively collapse before the actual housing market crash during what became the Great Recession. Burry was featured in Michael Lewis’ book about the era, The Big Short, and he was portrayed by Oscar-winning actor Christian Bale in the movie adaptation.
Likely due to The Big Short, Burry is often viewed as a permabear when, in reality, he’s also often long on stocks, according to his prior 13F filings, which he had to file while he ran Scion Asset Management.
But Burry has made plenty of bearish calls in recent years, and while many of them played out in the short term, the market has been resilient and rebounded, as most big crises since the pandemic have been short-lived.
In a recent Substack post, Burry was critical of AI exuberance and said the Nasdaq 100 is trading at levels that are just too good to be true. “This, all of it, is the scene of the bloody car crash, minutes before it happens,” Burry wrote.
Specifically, Burry has said that many AI companies are using improper accounting practices to distort profits. These include the way stock-based compensation is accounted for and how certain AI infrastructure is depreciated.
When properly accounted for, Burry believes, the Nasdaq 100 is trading closer to 43 times earnings than the 30-times multiple that Wall Street analysts and strategists currently believe. “History tells us that even if the party goes on for another week, month, three months, or year, the resolution will be to much lower prices,” he wrote.
How retail investors can position themselves
Both Burry and Yardeni are both very smart investors. Both could end up being right. The market could crash, only to rebound and hit Yardeni’s price target by year’s end.
The reality is that we simply don’t know how things will play out. AI could be a repeat of the dot-com bubble. It could also be as good as some say and continue to lead the market higher for the next few years. It’s going to be very difficult for retail investors, or any investor for that matter, to truly make a call with high conviction.
That’s why investors need to think about their goals and timelines. If you’ve got at least five or 10 years before you’ll be drawing on your investment funds, there’s no need to change your portfolio. Just sit tight. And any funds you’re counting on in the short term should be in cash — that’s wise in any market environment.
It’s also important to retest the thesis of the stocks you own. If they are trading at a rich multiple, make sure they can actually grow into that valuation over the next few years and that you aren’t just buying the stock due to FOMO (fear of missing out).
