"Super bull" Yardeni lowers S&P year-end target: Earnings are not the problem, valuation is

Renowned market research firm Yardeni Research has lowered its year-end target for the S&P 500 to 7,900 points, citing increased risk of valuation compression rather than a deterioration in earnings prospects.

The risk-off sentiment that has persisted since mid-September is further reducing stock valuation multiples. Yardeni Research has cut its S&P 500 year-end target from the previous 8,400 points (a target which had already been postponed to mid-2027) down to 7,900 points, and also reduced its year-end forward price-to-earnings ratio target from 19.8x to 18.6x.

At the same time, the market is facing multiple pressures: higher-than-expected September CPI data is boosting expectations of additional Fed rate hikes this year, AI trading frenzy has notably cooled, and tech stocks have seen heavy selling. The S&P 500 fell 1.1% to 7,718.94 points on Wednesday, while the Nasdaq Composite and Russell 2000 both declined 1.9%, and the Philadelphia Semiconductor Index (SOXX) plunged 4.5%.

Yardeni Research has made it clear that the current market risk is a valuation issue, not an earnings issue. The firm is maintaining its 2027 S&P 500 per-share earnings forecast at $425, which is nearly in line with the market consensus of $423.08, indicating continued optimism regarding corporate earnings and the economic outlook. Yardeni also expects no recession before 2029.

However, the firm believes that the risk-off sentiment since mid-September will not dissipate easily and will continue to suppress valuation multiples. Based on this outlook, it has lowered the year-end forward P/E target from 19.8x to 18.6x, with a corresponding year-end S&P 500 target dropping from 8,400 points to 7,900 points. "We are not concerned about earnings, but about stock valuations," Yardeni wrote.

Inflation data has been a key trigger in this round of market pressure. September CPI rose 0.6% month-on-month, the largest monthly increase since March, mainly driven by a 9.3% surge in energy prices. Core CPI rose 0.3% month-on-month, and 52% of CPI subcomponents now have annualized inflation rates above 3%.

Durable goods prices increased by 0.9% month-on-month, with computer and electronics prices recording the highest inflation rate in nearly three months—a trend Yardeni attributes to AI-driven semiconductor demand.

The hot CPI data quickly reignited market concerns about Fed rate hikes. The probability of an October rate hike jumped from 21% to 36%, and at one point during the session hit 45%, with markets expecting as many as two additional hikes this year. Nevertheless, Yardeni pointed out that the 10-year US Treasury yield is now showing signs of stabilizing, partly because inflation-protected bonds (TIPS) still offer a real yield of close to 2.90%, which remains attractive.

The technology sector has become the epicenter of this correction. Yardeni Research noted that "AI trades are becoming chaotic, with intensifying competition and rising market skepticism about the returns on massive AI investments." The Philadelphia Semiconductor Index plunged 4.5% in a single day, reflecting the market's reassessment of AI-related investment prospects.

Shares of newcomer cloud infrastructure provider CoreWeave plunged approximately 16% as concerns about its debt repayment ability intensified, further dampening sector sentiment.

Looking ahead, Yardeni Research listed several potential risks, including intensified political polarization following the midterm elections, as well as the possibility of renewed escalation in the Middle East. "We expect risk-off sentiment to persist, further compressing valuation multiples. That is also why we still recommend caution," said Yardeni.

However, the firm has also issued some optimistic signals, stating that "buying opportunities are increasing," and noting that a rebound in the S&P 500 towards 7,900 points by year-end remains possible.