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Yardeni believes that although the US stock market faces uncertainties such as the midterm elections, AI investment restrictions, and the war in the Middle East, the US economy remains resilient and corporate earnings are expected to continue to strengthen. If the stock market retreats then it will be a buying opportunity.
The US stock market has been increasingly volatile recently, and some market experts have concluded this based on technical analysisUS stocks It has reached its peak and has begun to decline. This may happen gradually now or early next year, and it will lead to a bear market. Butwall Street Yardeni, a well-known strategist, said that from a fundamental perspective, US stocks may turn around after the November 3 midterm elections.
Yardeni, president and chief investment strategist of Yardeni Research, said that Halloween may not be here yet, but some investors are scared for three reasons:
1. Mid-term elections will be held in America next week.republican party It is still possible to retain control of the Senate and the House of Representatives, but several polls show that Republicans may lose the House of Representatives and even the Senate is in danger. US stock investors generally prefer gridlock in Washington to provide checks and balances of power and reduce the risk of excessive legislation and government tyranny.
However, investors are worried that the post-election confrontation between the two parties in the United States may intensify, meaning the risk of a debt ceiling crisis and government shutdown will increase again. US President Trump will be constrained, which may increase policy uncertainty. Trump may be even more reckless after the election, signing executive orders to implement more controversial policies, repeating the mistakes of the original implementation of tariffs and taking other measures that may upset the market. Even though Congress is at an impasse, one thing is certain: Policy uncertainty is likely to increase market volatility after the midterm elections.
2. The boom in artificial intelligence (AI) investment faces three major barriers: financial barriers, physical barriers, and political barriers. AI stocks have been out of favor recently due to limited access to capital, reflecting investor skepticism about whether huge AI investments can generate returns. Is there enough capital to finance these investments? At the same time, power shortages, limited grid capacity, and growing protests against the construction of data centers across the United States could slow the pace of AI deployment.
If the Democratic Party wins the election, it can strictly monitor data center investment projects. Trump’s veto power can only limit legislation at the federal level, but restrictions at the state and local levels could delay investment plans and increase costs, putting further pressure on AI stocks.
3. Trump has warned that war with Iran may increase after the midterm elections. Once a new round of fighting begins between the United States and Iran, it could push oil prices above US$120 a barrel and back to the highs seen in the early days of the war. If oil prices remain high for a long time, it could keep inflation high for a long time, forcing the Federal Reserve (Fed) to raise interest rates. In this scenario, the trend of a simultaneous rise in global government bond yields could be repeated, increasing the risk of crisis in some corners of the financial system.
However, Yardeni is optimistic. He explained that the reason for the short market is usually that the central bank’s tight monetary policy leads to a financial crisis, which quickly turns into a credit crisis that affects the entire economy and leads to a recession. It is true that when the US stock market fell into a bear market in 2022, the economy did not decline and, comparatively speaking, the bear market was small and shallow. Looking back later, it proved to be a great buying opportunity. Investors who had bet on the resilience of the US economy at the time won.
Yardeni believes that today, the chances of betting on the resilience of the US economy are still high. If so, corporate earnings could continue to rise and the stock market could reach new highs. The bull market over the past two years has been dominated by rising corporate earnings, while valuation multiples have declined rather than increased, which means: stock prices have become cheap.
He pointed out that since the beginning of 2020, the US economy has passed several rounds of stress tests and is expected to face tests in the future. Even if a “divided government” is formed after the midterm elections, it is still impossible to slow down the economy. The federal deficit is set very high, but it helps fuel growth.
Yardeni believes the decline in US stocks could be a good thing to deflate the AI bubble a bit. For example, more restricted access to capital should lead to more efficient allocation of capital, which, along with other restrictions, is expected to reduce the risk of overinvestment. More importantly, the major players in this wave of AI investment boom still hope to obtain financing to continue spending.
If the US economy passes the latest round of stress tests, corporate earnings will also rise. Therefore, the earnings-driven bull market pattern of US stocks is expected to remain unchanged. Any sharp retracement caused by investor jitters should be a buying opportunity.
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He argued that the market really wants to focus on fundamentals and not short-term sentiment. If the US economy can overcome this round of stress tests, corporate earnings are expected to continue to rise, and the stock market will still have a chance to maintain its earnings-driven bullish pattern.
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There are three main items: policy uncertainty due to the midterm elections, AI investment cooling due to financial and physical sanctions, and the escalating conflict between the United States and Iran that could push up oil prices and interest rates, further unsettling financial markets.
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He believes that over the past two years, corporate earnings have gradually been dominated by bullishness, and valuations have declined, which means that stock prices may no longer be expensive. Even if the market experiences a big retracement due to panic, as long as the economy and earnings are not weak, it should still be considered a bargain opportunity.
