Wall Street veteran strategist Ed Yardeni has updated his outlook for what he calls the "fast-changing era," suggesting that as the Iran conflict escalates and impacts global markets, the risk of a sharp sell-off in U.S. stocks this year is increasing. Yardeni has raised the probability of a U.S. stock market crash during the remainder of the year from his previous estimate of 20% to 35%. At the same time, he has significantly lowered the likelihood of a market melt-up—a surge driven more by investor enthusiasm than fundamentals—from 20% to just 5%.
This adjustment reflects growing concerns that prolonged conflict in the Middle East, along with the resulting inflationary shock, could squeeze household spending, erode corporate profit margins, and complicate the Federal Reserve's policy path. On Monday, international oil prices surpassed $100 per barrel for the first time since 2022, contributing to declines in both equities and U.S. Treasury securities.
Yardeni noted, "The U.S. economy and stock market are currently caught between Iran and a hard place, and so is the Fed. If the oil price shock persists, the Fed’s dual mandate will face challenges—on one hand, rising inflation risks, and on the other, increasing unemployment risks."
Data released on Friday showed an unexpected decline of 92,000 in U.S. nonfarm payrolls for February, with the unemployment rate edging up to 4.4%. One clear winner has been the U.S. dollar, which appreciated against nearly all major currencies over the past week. Meanwhile, other traditional safe-haven assets—including U.S. Treasuries, the Japanese yen, the Swiss franc, and gold—declined.
During early Asian trading on Monday, S&P 500 index futures fell 1.6%, signaling renewed pressure on equities, while hedge funds increased their short positions on U.S. stocks.
Yardeni has a track record of accurate market calls. In December, the strategist recommended underweighting the so-called "Magnificent Seven" U.S. stocks relative to the rest of the S&P 500. However, his base-case scenario remains unchanged. The "Roaring 2020s" scenario—a decade of strong and sustainable U.S. economic growth driven by rapid productivity gains—still holds a 60% probability by year-end.
Looking further ahead, the outlook becomes more optimistic. Yardeni assigns an 85% probability that the "Roaring 2020s" will continue. At the same time, he sees a 15% chance of a "1970s-style stagflation replay." He wrote, "If investors begin to anticipate stagflation, the likelihood of a bear market becomes significantly greater."
Comments