Ed Yardeni lowers S&P 500 year-end target to 7,900 on rate hike

Ed Yardeni has reduced his S&P 500 year-end target from 8,400 to 7,900, a revision he attributes to rising bond yields following the Federal Reserve's decision to increase interest rates. The analyst, who previously predicted the benchmark would reach 8,400 by the end of 2026, now expects that level to be achieved only by mid-2027.

The change in forecast coincides with the Federal Open Market Committee's move on Wednesday, September 16, to raise the Fed Funds Rate rather than lower it. The Committee aimed to combat inflation by tightening monetary policy, a sharp departure from the easing path anticipated after Jerome Powell was replaced by Kevin Warsh as Fed Chairman in May. That transition had been expected to facilitate lower rates, but geopolitical actions involving Iran disrupted oil supplies and drove up gas prices, complicating the inflation outlook.

Yardeni cited a backup in bond yields as the primary driver for his adjustment. In a research note reported by Bloomberg, he stated that the forward P/E ratio for the S&P 500 at year-end was lowered from 19.8 to 18.6. This valuation shift directly reduces his target from 8,400 to 7,900, up from the index's current level of 7,610. The 10-year Treasury Note yield has risen toward 5%, creating a headwind for corporate revenue and profit growth by making bonds more competitive with equities and raising borrowing costs.

The Fed's strategy seeks to offset inflationary pressure from energy by dampening end-user demand. However, current data suggests inflation remains a supply-side issue. The Personal Consumption Expenditures price index rose 3.7% in July, while core PCE increased 3.3% year-over-year, both well above the Fed's 2% target. Goldman Sachs projects core PCE will be 3.15% in August, accounting for methodology changes that reduce reported inflation figures.

The September dot-plot indicates that Fed members expect a second rate hike before the end of 2026, which would roll back cuts made in October and December under previous leadership. The CME FedWatch tool currently shows a 49% probability that rates will reach a range of 4% to 4.25% in October, up from a 7% probability a month prior. Fund manager Chris Versace noted that this outcome exceeds market expectations prior to the update. Four of the 18 Fed members who submitted their outlooks believe rates could rise two more times.

Market reaction to the decision has been mixed. While the S&P 500 initially gained ground, volatility caused the index to reverse and close down 0.4% by 3 p.m. EDT. Hedge fund manager Doug Kass warned against sustained rallies, stating he expects to short indices on any upward move and believes the S&P and Nasdaq have already reached their yearly peaks.