Stocks could plummet after an ill-advised ‘melt-up’ if the Fed cuts rates to avoid a recession

• According to market veteran Ed Yardeni, there is a growing risk of a meltdown in the stock markets.

• Yardeni said the return of the ‘Fed Put’ means stocks can rise by anticipating and realizing rate cuts.

• But a stock market melt-up is rarely sustainable and is often followed by a painful decline.

There is a growing risk that the Federal Reserve could trigger a stock market collapse, according to market veteran and investment strategist Ed Yardeni.

The “Fed Put,” or the idea that the Fed will save the stock market with rate cuts amid any sign of economic weakness, has returned to markets after Fed Chairman Jerome Powell indicated last month that The next interest rate decision will probably be a cut and not an increase.

“Investors’ expectations that the Fed would nip a recession in the bud by easing mean the Fed Put is back,” Yardeni told clients in a note on Tuesday. “Its returns reduce the risk of a recession and a bear market. It increases the risk of a stock market melt-up.”

Ultimately, investors’ anticipation of monetary easing from the Fed via rate cuts, whether realized or not, could unleash a new wave of animal spirits that will catapult the stock market much higher from here.

Yardeni himself sees the S&P500 the record will rise to 5,400 by the end of the year, and it has also been suggested that the index could increase by no less than 25% to 6,500 until 2026.

“We don’t expect a recession this year that the Fed would have to address by easing. But because some investors think that could happen, the Fed Put is back. That brings a greater risk of a stock market collapse,” he said. Yardeni.

The positive outlook for Yardeni shares and the potential risk of an unsustainable stock market boom is supported by the fact that earnings expectations continue to rise following better-than-expected first quarter results.

Wall Street analysts now expect S&P 500 earnings growth of 10.1% this year, accelerating to 13.9% in 2025 and 11.8% in 2026, meaning an increasingly positive outlook for corporate earnings.

“As we have often seen in the past, when the probability of a recession is low, the S&P 500’s future earnings are a very good leading indicator of actual earnings,” Yardeni explains. And rising profits are what ultimately drives stock prices higher in the long term.

But the growing risk of a stock market collapse coincides with the risk of a stock market sell-off, as a melt-up is rarely sustainable and is usually quickly followed by a quick and painful decline.

The story continues

For investors, the question is whether or not a potential stock market collapse and subsequent decline will occur at prices much higher or lower than current levels.

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