Stocks Could Face Meltdown As Bubble in Overvalued Names Pops: Ed Yardeni

• Stocks could face a meltdown as the bubble in firms riding the AI excitement pops, Ed Yardeni said.
• The current bull market in stocks is unusual, as they typically begin when valuations for firms are low, he said.
• “The problem with melt-ups is that they almost always invariably are followed by meltdowns.”

The stock market could have a meltdown as the bubble in overvalued mega-cap shares begins to burst, according to market veteran Ed Yardeni.

In an interview with Fox Business on Monday, the president of Yardeni Research warned of a potential fallout in stocks, referring to his previous forecast that the craze for artificial intelligence stocks was setting up the market for the “Mother of All Melt-Ups.” 

That’s already visible in the outperformance of eight mega-cap stocks this year, with Nvidia, Alphabet, Microsoft, and other tech titans soaring as they ride the wave of excitement for AI. 

Yardeni predicted stocks will continue to rise through 2023 into next year, potentially taking the S&P 500 to 4,600 by year-end. But if stocks rise too quickly, it could spell trouble for the market as the bubble in overvalued names pops.

“The problem with melt-ups is that they almost always invariably are followed by meltdowns,” Yardeni warned.

He noted that the current bull market in stocks was unusual, as they typically begin when valuations for firms are low. When stocks hit a low of 3,600 in October of last year, stocks were still fairly expensive, Yardeni noted, with the price-to-earnings ratio of the S&P 500 hovering around 15. 

That ratio is now around 18, largely due to the success of the eight mega-cap firms. 

Yardeni’s warning comes as other Wall Street strategists have sounded alarms of a coming earnings recession that will hit the market, as firms continue to battle high inflation and high interest rates. High rates also risk tipping the economy into recession, experts warn, which is also likely to weigh on stocks.

For his part, Yardeni previously predicted that the US had a 60% chance of avoiding a recession, as the economy has held up against aggressive interest rates hikes so far.

He is also more upbeat on earnings, saying S&P 500 companies are likely to see profits of $225 a share at the end of the year, above Wall Street’s average prediction of $206.