Ed Yardeni, President of Yardeni Research, stated that while a 5.2% bond yield is unlikely to "knee-cap" the stock market or the broader economy, a 6% yield would make investors considerably more cautious. He highlighted that a typical scenario for economic cracks to develop involves higher interest rates leading to a credit crunch, which could then precipitate a recession. However, Yardeni currently does not believe the economy is in such a business-cycle environment, pointing to a strong nominal Gross Domestic Product (GDP) growth of 6.6% year-over-year in the second quarter (Q2), suggesting the economy remains on solid footing as long as bond yields stay below the pace of nominal economic growth.
Yardeni also indicated that he could not rule out the 10-year U.S. Treasury yield moving beyond 5.5%, but he called 5.25% an attractive level for bond buyers. He now forecasts the S&P 500 to reach 7,900 by year-end and 8,400 by mid-2027, having adjusted his more optimistic year-end outlook into the following year. Yardeni described corporate earnings as "phenomenal" and sees no indication that earnings expectations will be reduced over the remainder of 2026.
Despite rising yields, Yardeni maintains a bullish outlook for equities, citing strong economic indicators and continued earnings momentum. He believes that higher bond yields reflect an "absolutely booming" economy, with robust consumer activity and strong capital spending. However, he noted that higher rates are impacting the housing market, creating a "K-shaped" and generational economic divide where many younger adults cannot afford homes, while older Americans benefit from increased interest income. Yardeni also mentioned that the Federal Reserve might tighten rates further due to higher oil prices contributing to stickier inflation.
