Yardeni sees further valuation declines as risk-off sentiment persists

Investing.com -- Risk-off sentiment that first emerged in mid-September is likely to persist and further compress stock valuations, Yardeni Research argues, even as the firm remains bullish on earnings and sees no recession through 2029.

"Our concern isn’t earnings; it’s stock valuations," Yardeni wrote. The investment research firm kept its 2027 S&P 500 earnings forecast at $425 per share, only slightly above the industry consensus of $423.08, but lowered its year-end forward P/E target from 19.8 to 18.6. In turn, it cut its year-end S&P 500 target to 7,900 from a prior 8,400 goal that had been pushed to mid-2027.

The S&P 500 fell 1.1% to 7,718.94 on Wednesday, while the Nasdaq Composite and Russell 2000 each dropped 1.9%. Technology stocks led the selloff, with the SOXX semiconductor index tumbling 4.5%.

"The AI trade is getting sloppy amid intensifying competition and doubts about returns on massive AI investments," Yardeni wrote.

Shares of neocloud provider CoreWeave plunged 16% amid growing concerns about its ability to service its debt.

A hotter-than-expected September CPI report added to the pressure, raising the odds of two Fed rate hikes before year-end. The probability of an October hike jumped from 21% to 36%, briefly touching 45%, after headline CPI rose 0.6% month-over-month, its biggest increase since March, driven by a 9.3% surge in energy prices.

Core CPI rose 0.3%, with 52% of CPI categories now showing annual inflation above 3%. Durable goods prices jumped 0.9%, with computer and electronics prices climbing to a record three-month inflation rate that Yardeni linked to AI-driven semiconductor demand.

Despite the hawkish inflation data, the 10-year Treasury yield appears to be stabilizing, as Yardeni forecast over the weekend, partly because Treasury Inflation-Protected Securities continue to offer attractive real yields near 2.90%.

Looking ahead, the firm flagged several market risks, including rising political partisanship following the midterm elections and the risk of renewed escalation in the Middle East. "We expect risk-off sentiment to persist, further compressing valuation multiples. That’s why we still recommend proceeding with caution," Yardeni said.

But even so, the firm added that "buying opportunities are increasing," and that a year-end rally toward 7,900 remains possible.

Original Article

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