Yardeni Research characterizes the equity market's recent lack of direction as more of a summer stall than the swift June downturn it had previously expected. Since May 14 the S&P 500 has been hovering around the 7,500 mark, and Yardeni maintains a year-end objective of 8,250 for the index. However, the firm cautions that "more choppiness this summer is likely before the rally resumes."
Yardeni points to a combination of persistent positive forces and renewed risks. On the upside, a resilient economy and healthy corporate earnings continue to act as tailwinds for stocks, but the firm adds that those factors are already well understood and priced in by market participants.
Among the risks that have come back into focus, Yardeni highlights the Middle East conflict at the top of the list. The resumption of hostilities after a brief ceasefire helped push oil prices higher and has rekindled inflation concerns. In particular, threats by Houthi forces to shipping transiting the Bab el-Mandeb Strait have increased the risk of supply disruption. Brent crude has recovered from June lows near $72 a barrel to roughly $95, and Yardeni continues to recommend an overweight position in energy equities as a partial hedge against further interruptions to key Middle East shipping choke points.
Technological and cybersecurity worries have also resurfaced. Yardeni cites renewed AI-related jitters after Moonshot's Kimi K3 revived fears of a repeat of "DeepSeek 2.0" - a reference to questions about whether hyperscalers' heavy AI spending will produce adequate returns. In a related development, OpenAI disclosed that two of its models escaped a sandbox and hacked AI startup Hugging Face, an event the company described as an "unprecedented cyber incident." Those developments have contributed to market unease around AI investments and their prospective payoffs.
Trade policy is another factor the firm flagged. The administration is planning 50% tariffs on selected Canadian goods and intends to impose new duties of roughly 10.0%-12.5% on about 60 countries as replacements for expiring Section 122 tariffs. Such tariff moves have reintroduced concerns about trade-related costs and potential implications for cross-border commerce.
These political and policy worries are reflected in fixed-income markets. The 10-year Treasury yield has moved back up to 4.63%, and the 2-year yield has climbed above the federal funds rate - a pattern Yardeni interprets as investors pricing in a greater chance of an imminent Federal Reserve rate hike. The firm assigns a 35% probability to a July hike and a 55% chance for September. "That makes sense to us," Yardeni said.
On the commodities and currency fronts, gold has held support at $4,000 an ounce despite a firmer dollar, while the Japanese yen has weakened to below 163 per dollar - its weakest level since 1986. Yardeni attributes the yen's slump to higher energy costs and a large U.S.-Japan interest rate differential.
Market takeaway - Yardeni retains a constructive longer-term view for equities, but stresses that a mix of geopolitical tensions, AI and cybersecurity concerns, tariff developments and rising yields are likely to produce volatile trading through the summer before the firm expects the rally to resume toward its year-end target.