Key Takeaways:
The bull market has further to run, and the data the bears are pointing to is measuring the wrong thing, according to Ed Yardeni, president of Yardeni Research.
"I've been among the bulls and haven't been bullish enough," Yardeni said on CNBC's "Squawk Box" on June 15. The S&P 500 has surged 17% in the past four weeks, with more than 85% of companies in the index seeing forward earnings rise on a year-over-year basis. Earnings are on track for 23% to 24% growth this year, a pace typically seen only coming out of a recession.
The disconnect that has confounded bears — disposable personal income falling while consumer spending rises — is explained by what Yardeni calls the "G-shaped economy," where G stands for generational. Baby boomers collectively hold $89 trillion in net worth, and as they retire in historic numbers, their income drops out of the statistics while their spending, and the spending they support for younger family members, stays strong.
"Boomers are doing absolutely great," Yardeni said. "If they're still working, they're making a lot of money in salaries. If they're retiring, they've got $89 trillion of net worth collectively. As they retire, guess what? They're not getting the paycheck anymore."
Nearly one in five adults ages 25 to 34 are living with a parent today, a share that has more than doubled from 8% in 1980. The boomer balance sheet is effectively becoming the younger generation's spending power, Yardeni argued, as older Americans draw down wealth to support adult children facing an affordability crisis.
The end of the Iran conflict adds another tailwind. The war had made the US look more attractive as an oil exporter while most of the rest of the world imports oil. With the Strait of Hormuz reopening, leadership may shift back to foreign stock markets, Yardeni said. Emerging markets, particularly India, stand to benefit as energy price pressures ease.
SpaceX and the Roaring Twenties
The SpaceX IPO, which priced at a roughly $75 billion valuation or about 100 times revenue, exemplifies the "Roaring 2020s" thesis Yardeni has been advocating. The total market capitalization of US stocks is around $100 trillion, making the SpaceX deal a drop in the bucket, he said. But the valuation level suggests at least some degree of irrational exuberance, he added.
The US now accounts for about 65% of the MSCI All Country World Index, up from levels that already seemed extreme two years ago. Arvind Sanger, managing partner of Geosphere Capital Management, said such extremes often occur near the top of bull markets, with metrics such as US market capitalization relative to GDP at very elevated levels.
"I feel much more comfortable allocating capital to emerging markets, Europe and other regions where valuations and expectations are far less stretched than in the US," Sanger said.
The 10-year Treasury yield has moved in tandem with the equity rally, while the US dollar index has shown signs of softening as the geopolitical premium fades. Oil prices have declined on expectations of normalized flows through the Strait of Hormuz, providing a tailwind for import-dependent economies.
Yardeni's framework suggests the consumer engine has more fuel than the income data implies, but he acknowledged the dynamic is not sustainable indefinitely. Boomers are not immortal, and a portfolio is not a paycheck. When the wealth transfer slows, the consumption engine that has been confounding the bears loses its fuel. For now, the data supports the bull case.
This article is for informational purposes only and does not constitute investment advice.
