On September 24, 2024, we hosted our 6^th Market Outlook with Ed Yardeni where the prominent Wall Street strategist provided his current thoughts on the U.S. economy and stock market, including three potential market scenarios and his probabilities for each. See below for a replay of the webcast as well as a written summary.

Market Outlook:

• Resilience of the U.S. Economy: Ed Yardeni notes that the U.S. economy has been quite resilient in 2023. He emphasizes that despite concerns about inflation, rising unemployment, and other risks, the economy has continued to grow. Yardeni stresses that a recession has not materialized, as many feared, and he attributes this to a strong labour market and the Federal Reserve’s actions.
• Unemployment and Labour Force: The slight increase in the unemployment rate from 3.5% to 4.2% has been primarily driven by more people entering the workforce rather than layoffs, reflecting an expanding labour market. Yardeni speculates that immigration may be contributing to the rise in labour supply. Overall, he sees the labour market as healthy.

Fed’s Monetary Policy:

• Shift from Inflation to Unemployment: Ed explains how Fed Chair Jerome Powell has shifted focus from fighting inflation to addressing unemployment concerns. Initially, Powell was focused on bringing down inflation, but following the Jackson Hole Conference in August 2023, Powell signaled that inflation was largely under control and that the Fed would now prioritize preventing a rise in unemployment.
• Rate Cuts: The Fed’s decision to cut rates by 50 basis points rather than the expected 25 indicates its aggressive approach to preventing a recession. Yardeni suggests that while this move reduces recession risk, it could also lead to an overheating economy, which might increase demand for labour and goods, potentially reigniting inflation.
• Productivity Offsetting Inflation: Yardeni remains optimistic that rising productivity will offset inflationary pressures. He sees productivity gains as a key factor in maintaining economic growth without significantly increasing inflation.

Market Scenarios:

Yardeni outlines three potential market scenarios and updates his probabilities for each:

1. Roaring 20s (50% probability): This scenario envisions a prolonged period of growth driven by chronic labour shortages that push companies to invest heavily in technology. This investment leads to higher productivity, real GDP growth, rising wages, and expanding profit margins — all without significant inflation. Yardeni believes this is the most likely scenario, reflecting his optimism about the long-term potential of technological innovation.
2. 1990s-style Melt-up (30%): Yardeni increases the likelihood of this scenario, where the Fed’s aggressive easing stimulates rapid stock market growth, particularly in the technology sector. This scenario resembles the late 1990s when stock markets soared as the Fed cut rates. Yardeni believes that if the Fed continues its current course, this kind of melt-up could occur.
3. 1970s-style Stagflation (20%): Although less likely, Yardeni still considers the possibility of a geopolitical shock (e.g., a spike in oil prices) causing inflation to rise sharply, forcing the Fed to tighten monetary policy again. This scenario would mirror the stagflation of the 1970s, where high inflation and stagnant growth coexisted.

Stock Market Outlook:

• Magnificent 7 and Valuation: Yardeni highlights the dominance of the “Magnificent 7” (top tech companies like Apple, Microsoft, etc.), which account for 30% of the S&P 500’s value and trade at elevated valuations (around 28x earnings). He argues that while these companies’ valuations are high, they are justified by their strong cash flow and innovation capabilities.
• Opportunities in the Rest of the Market: The remaining “493” companies in the S&P 500 have lower valuations (around 18x earnings). Yardeni sees potential for growth in these companies, especially as they adopt more technology to enhance productivity and expand profit margins. However, he notes that smaller companies (mid- and small-caps) have underperformed in recent years.
• Focus on Earnings Growth: Yardeni emphasizes that the stock market’s future performance will be driven more by earnings growth than by further valuation expansion. He expects companies to continue improving profitability, particularly through productivity gains.
• Profit Margins and Productivity: Yardeni expresses confidence that profit margins can continue to expand, especially as companies adopt new technologies to improve efficiency. He sees this as a key driver of future earnings growth.
• Productivity as a Solution: Yardeni describes productivity as “fairy dust” that benefits everyone — it boosts economic growth, curbs inflation, improves profit margins, and allows wages to rise faster than prices. He sees productivity as the solution to many of the economic challenges of the current decade.

Investment Ideas:

Hamilton U.S. Bond YIELD MAXIMIZER™ ETF (HBND)

• Higher tax-efficient monthly income from U.S. treasuries
• 100% long-term U.S. treasuries (portfolio duration: ~17 years)
• Available in CAD-hedged (HBND) and USD-unhedged (HBND.U) units

Hamilton U.S. T-Bill YIELD MAXIMIZER™ ETF (HBIL)

• Higher yield cash alternative from U.S. treasuries
• 80% short-term U.S. treasuries; 20% long-term (portfolio duration: ~3.5 years)
• Available in CAD-hedged (HBIL) and USD-unhedged (HBIL.U) units

Hamilton U.S. Equity YIELD MAXIMIZER™ ETF (SMAX)

• Unhedged exposure to the largest U.S. equities with S&P 500 sector mix
• Active covered call strategy to increase monthly income and reduce volatility
• Coverage Ratio = ~30% | Upside Potential = ~70% (based on market conditions)

 

 

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[1] As of September 24, 2023.