Transcription
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Welcome back to Squawk Box, the Federal Reserve kicking off its two day meeting on interest rates tomorrow. Want to take a closer look at the markets right now with Ed Yardeni, Yardeni Research president? Good morning to you, sir. Thank you. We're all trying to figure out where this is all headed. I think we're at a quarter point, but I don't know. Some people are now suggesting maybe we get, you know, half a point.
It's a stretch. It's possible. But I'm like everybody else in the quarter point camp. I've actually been in the camp that said, hey, you know, I don't know if we even need that because the economy is doing quite well. Labor market's been weak, but the GDP numbers are strong. So could it be that productivity is actually making a pretty nice comeback? If it is, I would explain the kind of discrepancy.
Is that an AI comeback? AI story? What is that to you?
Partly AI, but I think the what really has motivated the productivity surge, I think, is the shortage of labor, particularly skilled labor and companies. That's why, you know, initial claims, at least until last week, remained very, very low. And I think layoffs are going low because companies are holding on to their workers, their productivity.
In terms of the equity markets right now, baked into the cake already is a quarter point. So after that happens, let's say that happens. Does the market go up on the back of that news because it's confirmatory? Or does it say we were actually hoping for more?
Yeah. Well I think the market's hoping for 25. And we would be pleasantly surprised by 50 basis points. But 50 basis points really would create a multiple situation in the market where I think you'd see the market going up too quickly. On valuation. Right now, valuation isn't cheap. We've got a 22 times forward PE. This is really been an earnings led bull market. You know we we took that dive. Remember the last recession was during the pandemic. It only lasted two months. And then it took us a few months to recover. And since that point where we recovered what we lost, we're up 100% on the S&P 500 and forward earnings are up 100%. So it's very it's been a surprisingly robust earnings environment, especially this year in the face of tariffs. DOGE and all the other policy uncertainties.
And so when you think though about the unevenness of this market you talked about earnings. Yes 20 yeah 22 PE of 22 on a forward looking basis. But not cheap but super uneven. Meaning there's some companies that are pulling those numbers in crazy ways.
Well as you're you're right. I mean The Magnificent Seven are about over 30 times forward earnings. And then what I call the impressive 493 I think they're going to I think they have been impressive and we'll get even more. So I think you know those multiples are around 19 which isn't cheap. But it's certainly fair value than what we're seeing in The Magnificent Seven. But the Magnificent Seven have demonstrated over and over again that something that we haven't seen, I think, ever in the past were large companies just grow double digit earnings.
I want to just go with this idea of just how strong the economy is, because you're saying you believe it's actually very strong, to the point where I think you might not even cut a quarter point.
Exactly. I mean, I, I kind of see a similarity between now and what happened last year. Last year, the fed. Lowered interest rates by 100 basis points. From September to December, the bond yield went up 100 basis points. Because it turned out the economy wasn't all that weak and inflation wasn't a 2%, yet it was still elevated around 3%.
So do you think that the reason they'd be doing this is just because of the political pressure? What is your thought here?
Well, I think it's the political pressure. But they also have obviously the excuse here. I mean, they are data dependent and they don't necessarily agree with my interpretation of the labor market. The labor the labor market data has been weak. There's been a downward revision, but I don't think the GDP numbers are going to get revised. So I think the productivity numbers are going to get revised up. If if we've got now productivity led economic growth, then interest rates are basically where they should be. If they lower them, then the risk is that you get a melt up in the stock market and then you get a melt down.
So you look at things completely apolitically.
I try.
To yeah, I have never seen any bias in the things that you lay out on this. What do you think of everything that has been layered on this politically, and how do you sort through it?
Well, you know, I've been doing this for a few years, and one of my mantras that I've learned over the years is, it's truly amazing how well the US economy and the US stock market have done, despite Washington. You know, everybody's everybody's bias is to see the headlines, to look at fiscal monetary policy, all the politics. And my attitude is, wait a second, look at all the rest of us, all of us working stiffs that are doing an amazingly great job of running companies, running our businesses, working. And despite the.
What do you think about where the markets are right now? You had the S&P 500 hit an all time high during the trading session. Intraday you had the Nasdaq closed at a new high.
Well, since 2020 I've been talking about the roaring 2020s and so far so good.
I mean you think we've got another four years to go or.
So I got the market over 10,000 by the end of the decade. So yeah. And then I started talking about the roaring 2030s. I mean, the 20 the 1920s ended badly because of tariffs. And this time around we're kind of stress testing the global economy with a tariff issue now. And we got stock markets around the world at record highs. Despite that, that didn't happen in the early 30s. And so I think the resilience of the global economy, the US economy, earnings, companies being able to use productivity technology to increase their earnings, all that adds up to a bull market that continues.
Does it not matter what the fed does, or does it help even more if the fed cuts rates heading into what you are?
Well, I think it matters in the sense that if I think we're at neutral, I mean, the you know, the unemployment rate is 4.3%, the inflation rate is basically around 3%. It's still about a percentage point higher than the 2%. So we're kind of there, you know, when the kids in the back say are we there yet? We're kind of there in terms of the right level of interest rates. In my my opinion, if the fed continues to cut here, then the risk is that the valuation multiple starts to lead the market up. And instead of earnings and melt ups are followed by meltdowns.
First article I saw this morning I kind of I didn't read it, but it was and I don't want to say where it was because I look at a lot of different sources, but it was look for the S&P to suffer its biggest weekly decline since April after the fed cuts.
I doubt it.
That's the sell on the news. Yeah, yeah.
I people.
Have to write articles. You know.
I'll tell you why I doubt it because I think the real surprises here has been the resilience of the economy.
Nothing is done. Nothing has hurt it either. And earnings market or.
The earnings were much better in the first quarter than expected, much better than expected in the second quarter. And I think we have to take you know, it goes to the adage here is like, look how well our companies are doing. Despite the turmoil that of policymaking.
How are they eating the tariffs? That's the thing. And we had Gary Cohn on who said that they're laying off people.
Yeah I.
Just not hiring.
I just actually wrote it up. Partly. Part of the answer is it looks as though Chinese companies are actually cutting their prices in an effort to offset. So they're eating some of it. That's good. Companies are offsetti