Why are stock prices still rising? Yardeni explains

Yardeni Research attributes the recent ascent of U.S. equities despite weaker economic data to four key factors: heightened investor expectations for a September Fed rate cut, now at 89% odds; eased recession fears due to the U.S. economy's proven resilience; significant productivity gains, including a strong Q2 rebound offsetting labor shortages; and the long-term growth potential of the Digital Revolution, particularly AI, which could drive 3-4% annual productivity growth and potentially propel the S&P 500 to 10,000 by 2030. This outlook suggests fundamental factors are underpinning current market strength.

Analysis

Despite recent weaker-than-expected economic data, including disappointing PMI readings and revised payrolls, U.S. equity markets have demonstrated resilience, a phenomenon Yardeni Research attributes to four primary drivers. First, there is a significant market expectation for monetary easing, with CME FedWatch data indicating an 89% probability of a Federal Reserve rate cut in September. Second, acute recession fears have subsided as the U.S. economy has proven resilient to multiple shocks, supporting the view that the current bull market can be sustained by earnings growth rather than just multiple expansion. Third, a strong rebound in productivity during Q2 is helping to mitigate inflationary pressures, evidenced by unit labor costs rising a modest 2.6% year-over-year. Finally, the market appears to be pricing in a long-term growth narrative centered on the "Digital Revolution," particularly artificial intelligence, which Yardeni projects could fuel annual productivity growth of 3-4% and support an S&P 500 target of 10,000 by 2030 in a "Roaring 2020s" scenario.

Key Decisions for Investors

• Investors should assess exposure to long-term growth themes, particularly in technology and AI, as the market is pricing in a multi-year productivity boom driven by these sectors.
• The bullish outlook is contingent on productivity gains and earnings growth; therefore, closely monitor upcoming productivity reports and corporate profit margins to validate the current market narrative.
• Given the market's heavy reliance on an imminent Fed rate cut, positions should be managed with an awareness of potential volatility should incoming economic data cause central bank officials to delay or signal against easing.