Well-known market research firm Yardeni Research has lowered its target price for the S&P 500 to 7,900 points by the end of the year, citing an increased risk of valuation compression, rather than a deterioration in profit prospects.
The risk-aversion sentiment that has been simmering since mid-September is further driving down stock valuation multiples. Yardeni Research has lowered its target for the S&P 500 at the end of the year from 8,400 points to 7,900 points; this previous target of 8,400 points had already been postponed to mid-2027. At the same time, the firm has reduced its target price-earnings ratio for the end of the year from 19.8 times to 18.6 times.
At the same time, the market is facing multiple pressures: September CPI data, which was higher than expected, has boosted expectations for the Federal Reserve to raise interest rates this year. The trading enthusiasm for AI has significantly cooled down, and technology stocks have seen heavy selling. The S&P 500 fell 1.1% to 7,718.94 points on Wednesday, while both the Nasdaq Composite Index and the Russell 2000 Index declined by 1.9%. The Philadelphia Semiconductor Index (SOXX) tumbled 4.5%.
Valuation under pressure, target price lowered
Yardeni Research clearly identifies the current market risks as valuation issues, rather than profit issues. The institution maintains its forecast for earnings per share of the S&P 500 at $425 for 2027, which is not far off from the market's general expectation of $423.08, indicating that it remains optimistic about corporate earnings and economic prospects, and expects no recession before 2029.
However, the institution believes that the risk-aversion sentiment since mid-September will not dissipate easily and will continue to suppress valuations. Based on this assessment, it has lowered its target price-earnings ratio for the end of the year from 19.8 times to 18.6 times, corresponding to a target price for the S&P 500 at the end of the year from 8,400 points to 7,900 points. Yardeni writes: "What we are concerned about is not earnings, but stock valuations."
CPI Surpasses Expectations, Probability of Interest Rate Hikes Soars
Inflation data constitutes an important trigger for the current market pressure. In September, CPI rose 0.6% month-on-month, the largest single-month increase since March of this year, mainly driven by a 9.3% surge in energy prices. The core CPI also rose 0.3% month-on-month, and currently, 52% of the CPI sub-items have annualized inflation rates exceeding 3%.
Durable goods prices rose by 0.9% month-on-month, with computer and electronic product prices recording the highest inflation rate in nearly three months. Yardeni attributes this to the semiconductor demand driven by AI.
Hot CPI data has quickly reignited market concerns about the Federal Reserve's interest rate hikes, with the probability of a hike in October jumping from 21% to 36%, and at one point reaching 45% during trading. Markets expect there could be two more rate hikes this year. Nevertheless, Yardeni points out that the yield on 10-year U.S. Treasury bonds is currently showing signs of stabilization, partly because inflation-protected bonds ( TIPS ) still offer an attractive real yield of nearly 2.90%.
AI Trading Cools Down, Tech Stocks Lead the Decline
The tech sector became the epicenter of this round of adjustments. Yardeni Research pointed out: " AI trading is becoming chaotic, competition is intensifying, and there is a growing skepticism in the market regarding the huge returns on AI investments." The Philadelphia Semiconductor Index tumbled 4.5% in a single day, which reflects the market's re-evaluation of the investment prospects related to AI.
New entrant in cloud computing infrastructure providers, CoreWeave, has seen its stock price plummet by about 16%. Concerns about the company's ability to repay debts continue to rise, further dragging down the sentiment of the sector.
Looking ahead to the future market, Yardeni Research listed several potential risks, including intensified political party opposition after the mid-term elections and the possibility of a further escalation of the situation in the Middle East. Yardeni stated: "We expect that risk aversion sentiment will continue, further compressing valuation multiples. This is also why we still recommend taking a cautious approach."
However, the institution also sent out some optimistic signals, stating that "buying opportunities are increasing," and believes that there is still a possibility for the S&P 500 to rebound to 7,900 points before the end of the year.
