Yardeni Research has reduced its year-end S&P 500 target to 7,900 from 8,400, citing expectations that continued risk aversion among investors will place further pressure on equity valuations.
The investment research firm maintained its forecast for corporate earnings growth and continues to expect the US economy to avoid a recession through 2029. However, it lowered its year-end forward price-to-earnings (P/E) multiple target from 19.8 to 18.6.
Yardeni said its revised outlook reflects concerns about equity valuations rather than expectations of a deterioration in corporate earnings.
S&P 500 Earnings Forecast Remains at $425 for 2027
Yardeni Research retained its forecast for S&P 500 earnings of $425 per share in 2027, compared with the industry consensus estimate of $423.08.
Despite maintaining its earnings projection, the firm reduced its valuation assumptions, resulting in a lower index target.
The revised year-end target of 7,900 replaces an earlier objective of 8,400, which had previously been moved to mid-2027.
According to Yardeni, the shift towards risk aversion that began in mid-September could continue to reduce the valuation multiples investors are willing to pay for equities.
The firm nevertheless considers a recovery towards its revised target possible before the end of the year.
Technology Shares Decline as AI Investment Returns Face Scrutiny
The revised forecast follows declines across major US equity indices.
On Wednesday, the S&P 500 fell 1.1% to 7,718.94, while the Nasdaq Composite and Russell 2000 each declined 1.9%.
Semiconductor stocks recorded larger losses, with the SOXX semiconductor exchange-traded fund falling 4.5%.
Yardeni identified increasing competition and questions about financial returns from artificial intelligence infrastructure investment as factors affecting market sentiment towards technology companies.
Shares of AI cloud infrastructure provider CoreWeave (NASDAQ:CRWV) declined 16% amid investor concerns about the company’s capacity to meet its debt obligations.
The firm highlighted these developments as part of the broader reassessment of valuations among companies exposed to artificial intelligence spending.
September Inflation Data Raises Federal Reserve Rate Expectations
US inflation figures for September also contributed to changes in market expectations for monetary policy.
Headline consumer prices increased 0.6% month over month, the largest monthly rise since March, according to the figures cited by Yardeni.
Energy prices rose 9.3% during the month, contributing to the increase in the overall consumer price index.
Following the inflation report, market-implied expectations for a Federal Reserve interest rate increase in October rose from 21% to 36%, having briefly reached 45%.
The data also increased market expectations for two additional rate increases before the end of the year.
Core consumer prices, which exclude food and energy, increased 0.3% in September.
Yardeni noted that 52% of the categories included in the consumer price index were recording annual inflation rates above 3%.
Durable goods prices increased 0.9%, while computer and electronics prices reached a record three-month inflation rate. The firm associated the increase in technology-related prices with demand for semiconductors used in artificial intelligence applications.
Treasury Yields Show Signs of Stabilisation
Despite the inflation figures and changing expectations for Federal Reserve policy, Yardeni said the yield on the benchmark 10-year US Treasury note appeared to be stabilising.
The development was consistent with the firm’s forecast issued over the preceding weekend.
Yardeni identified yields on Treasury Inflation-Protected Securities (TIPS) as one factor potentially contributing to the bond market’s behaviour.
According to the firm, TIPS continued to offer real yields of approximately 2.90%.
The research firm considers developments in bond yields and monetary policy relevant to its assessment of equity valuations.
Geopolitical and Political Risks Remain in Focus
Yardeni also identified potential political and geopolitical developments that could affect investor sentiment.
These included the possibility of increased political partisanship following the US midterm elections and the risk of renewed escalation in the Middle East.
The firm expects risk-averse positioning to persist, potentially placing additional pressure on equity valuation multiples.
However, Yardeni maintained its expectations for corporate earnings growth and its forecast that the US economy will avoid recession through 2029.
Although the firm reduced its year-end S&P 500 objective to 7,900, it said declining valuations were creating additional potential investment opportunities.
Its outlook therefore combines expectations of continued earnings growth with a more moderate assessment of the valuations investors may assign to those earnings.