Four years ago in the early dark days of the pandemic, market strategist Ed Yardeni boldly predicted that the current decade would turn into a replay of the Roaring Twenties. As markets approach the midpoint of the decade, that prediction is looking uncannily accurate.
In a client letter over the weekend, Yardeni doubled down on his bullish scenario, saying that both the Dow Jones Industrial Average and the S&P 500 could each rise 50% to 60,000 and 8,000, respectively. Suddenly, that no longer looks far-fetched.
“Our Roaring 2020s scenario assumes that S&P 500 companies’ collective reported earnings per share grows at least 8.8% a year, which is the historical average growth rate since 1936,” he writes. “It could grow more than that if the growth rates of nominal GDP and real GDP exceed their average growth rates of 6.3% and 3.1% since the late 1940s. That could happen if productivity grows faster than its average of 2.0% since 1951, as we expect in our Roaring 2020s scenario.”
Yardeni also believes that a lifetime of wealth built up by now-retired and near-retired baby boomers is part of the reason for the U.S. economy’s surprising strength. Equities are up 40-fold since 1982 and 19-fold since 1990, he notes.
His upbeat scenario hinges upon “better-than-expected productivity growth,” which he said would translate into “better-than-expected growth in real GDP.” That would drive down “unit labor costs, which is the underlying rate of inflation,” his note continues. “It would allow wages to rise faster than prices. It would boost profit margins.”
That “already happened last year,” when productivity and real GDP climbed at a faster pace than unit labor costs, he said. “We are forecasting more of the same over the rest of the decade,” he writes. “That’s why we are projecting that the S&P 500 companies’ collective profit margin will increase from 12.0% last year to 13.2% this year and record highs of 13.7% and 14.6% in 2025 and 2026.”