Stocks could soar 30% in the next 2 years if 'mob psychology' doesn't spark a meltdown, market vet says

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Stocks could soar 30% in the next 2 years if 'mob psychology' doesn't spark a meltdown, market vet says
Adam Jeffery/CNBC/NBCU/Getty Images
  • The S&P 500 could notch 6,500 by 2026, according to market vet Ed Yardeni.
  • The Yardeni Research president said he was "rooting" for the bull market to continue steadily higher.
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Stocks could soar as much as 30% over the next two years, as long as "mob psychology" among investors doesn't spark a market meltdown, according to market veteran Ed Yardeni.

The Yardeni Research president predicted the S&P 500 could jump to 6,500 by 2026, implying a 30% gain from the benchmark index's current levels. That's because the bull market in stocks is likely to continue higher — though there's a small risk that investor exuberance goes too far, resulting in a stock market "meltup" followed by a "meltdown," he warned.

Those risks are due in part to investor hype over artificial intelligence, with FOMO surrounding generative AI fueling stocks to new highs in 2024.

"Your followers will hate you for not validating their enthusiasm. If this sounds like mob psychology rather than financial analysis, that's because it is," Yardeni said in a note on Tuesday.

Signs of a meltup have been flashing in some under-the-radar corners of the market. Long-term earnings growth estimates from industry analysts are hovering near readings associated with previous meltups, such as the dot-com bubble. Most extreme are the readings for the top eight mega-cap tech stocks in the market, with long-term earnings growth notching a record high as of the end of January.

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Other analysts have been warning that mega-tech stocks could be reaching overvalued levels, which could eventually spark a price correction in the market. The Magnificent Seven stocks, a group of 7 mega-cap tech firms that have soared on Wall Street's enthusiasm for AI, now make up nearly 30% of the total S&P 500, accounting for most of the stock index's gains last year.

A stock market meltup is good news for investors – until it's inevitably followed by a meltdown, a situation Yardeni has been warning about for months.

"That would be great for our bullish position, until it isn't. It's always easy to spot meltups after the fact because they are followed by meltdowns," he warned.

Yardeni noted that his firm was "rooting" for the bull market in stocks to continue steadily higher without a meltup/meltdown event, though he continued to remain concerned in regards to meltup risks.

But investors are still feeling pretty optimistic about stocks, particularly as they price in ambitious rate cuts from the Fed this year. Just over 42% of investors said they felt bullish about the stock market over the next 6 months, according to the latest AAII Investor Sentiment Survey. Markets, meanwhile, are pricing in a 63% chance the Fed will lower rates by at least 100 basis-points this year, more than what central bankers have officially projected.

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