Wall Street’s Dangerous Dance: Expert Strategist Cautions Against Stock Meltup

Important Details for the U.S. Trading Day

The mood in the U.S. trading session post-holiday appears uneasy, notably with major technology stocks like Nvidia experiencing a decline before the market opens, a day prior to highly anticipated earnings releases.

Market observers, including Joe Adinolfi from MarketWatch, suggest that Nvidia’s earnings could potentially disrupt market momentum due to high expectations from investors.

Ed Yardeni, president of Yardeni Research, issues a warning that not only optimistic investors but also Wall Street analysts themselves could contribute to market volatility. Yardeni points out a feedback loop phenomenon, where rising stock prices prompt analysts to revise their estimates upwards, perpetuating further price increases.

Yardeni emphasizes the difficulty of resisting market trends, which often leads to dissatisfaction among followers, likening this behavior to mob psychology rather than sound financial analysis.

While generally optimistic, Yardeni prefers a stable market supported by underlying fundamentals. He expresses concerns that excessive optimism driven by the feedback loop could lead to a market surge, typically followed by a downturn.

Analyzing long-term earnings growth (LTEG) data for S&P 500 companies, Yardeni and his team find that analysts tend to be overly optimistic about the future earnings prospects of the companies they cover. Historical LTEG peaks, such as those during the late 1990s tech bubble and after the 2018 corporate tax rate cut, serve as cautionary examples.

Yardeni also examines LTEG for the MegaCap 8 stocks, including Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla. These stocks, representing a significant portion of the S&P 500’s market capitalization, have recently seen substantial LTEG increases, particularly Nvidia.

The latest data show Nvidia’s LTEG soaring from 21.2% to 102.5%, significantly contributing to the overall MegaCap 8 LTEG increase, which settled at 38.5% in the latest available figures.