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Market veteran Ed Yardeni is growing increasingly worried about a stock market meltup.
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Yardeni said sentiment measures like the put-to-call ratio are flashing contrarian bearish signals.
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“The problem with meltups is that they do need to meltdown,” Yardeni said.
Market veteran Ed Yardeni is growing increasingly worried about a potential stock market meltup as the S&P 500 keeps hitting new record highs.
Yardeni has been one of the biggest bulls on Wall Street since the stock market bottomed in October 2022, and his 2024 and 2025 year-end S&P 500 price targets of 5,400 and 6,000, respectively, are some of the highest among market strategists.
But the stock market’s surge to consecutive record highs in the past week has led Yardeni to offer some cautious comments, as the strategist worries that the stock market rally has gone too far too fast and could ultimately suffer the type of meltup and meltdown that happened during the late 1990s.
“The problem with meltups is that they do need to meltdown,” Yardeni told CNBC on Wednesday.
In a recent note to clients, Yardeni highlighted short-term sentiment measures that suggest there is reason for caution.
The Bull/Bear ratios, derived from the Investors Intelligence and AAII investment sentiment surveys, have hit elevated levels recently. Additionally, the put-to-call ratio, which measures the amount of protection investors are buying via options contracts, has hit relatively low levels.
“From a contrarian perspective, that’s bearish,” Yardeni said.
Of course, there’s a good reason why stocks have moved so much higher in recent weeks and months, according to Yardeni. He pointed out that the economy and jobs market remains resilient and on strong footing, and that inflation has come down considerably.
This was reinforced by the fourth-quarter GDP release on Thursday, which showed economic growth of 3.3%, well ahead of economist expectations for growth of 2.0%.
But that strong data also plays into one of Yardeni’s biggest worries: the potential for the Federal Reserve to lower interest rates, which could exacerbate a meltup in the stock market.
“Imagine what could happen if the Fed actually starts lowering interest rates. That’s what I am concerned about is that that could spark a meltup in the market,” Yardeni said.
To Yardeni, interest rate cuts are akin to the Fed pouring gasoline on the stock market rally, and it could fuel further asset price inflation and even drive a rebound in inflation.
“I think the Fed would be making a mistake to lower interest rates. I think Powell is going to start pushing back against [that]. He’s very aware of market forces and if the stock market just keeps going up, it creates a positive wealth effect and then that creates the potential for inflation to make a comeback,” Yardeni said.
Read the original article on Business Insider