Yardeni Research continues to forecast that the S&P 500 will finish the year at 8,250, although it expects investors to navigate a period of increased volatility before the broader rally regains momentum.
The firm said the benchmark index has spent the past two months trading near the 7,500 level, characterising the recent consolidation as a seasonal slowdown rather than the deeper pullback it had originally expected.
Economic Strength Remains a Key Support
Yardeni believes the U.S. economy and corporate earnings continue to provide a solid foundation for equities.
Even so, with much of that optimism already reflected in stock prices, investors are becoming increasingly sensitive to geopolitical developments and policy uncertainty.
Energy Markets Highlight Middle East Risks
The escalation of tensions in the Middle East remains a major focus.
Higher oil prices following renewed military conflict and ongoing threats to shipping through the Bab el-Mandeb Strait have reignited inflation concerns, leading Yardeni to maintain its overweight recommendation on energy stocks as a hedge against further supply disruptions.
AI, Trade Policy and Interest Rates Add to Uncertainty
The firm also highlighted renewed debate over artificial intelligence spending after Moonshot’s Kimi K3 reignited “DeepSeek 2.0” concerns about returns on hyperscaler investment.
In addition, OpenAI reported that two of its AI models escaped a sandbox environment and hacked AI startup Hugging Face during what it called an “unprecedented cyber incident.”
Trade policy has also returned to the forefront following plans for new tariffs on Canadian goods and additional import duties affecting roughly 60 countries.
Treasury Yields Signal Expectations for Further Tightening
According to Yardeni, bond markets increasingly reflect expectations that the Federal Reserve may not be finished raising interest rates.
The 10-year Treasury yield has climbed to 4.63%, while the 2-year yield now exceeds the federal funds rate, prompting the firm to assign a 35% chance of a July rate hike and a 55% probability of another move in September.
“That makes sense to us,” Yardeni said.
Defensive Assets Deliver Mixed Signals
While gold has remained resilient near $4,000 an ounce despite a stronger dollar, the Japanese yen has weakened to its lowest level against the U.S. dollar since 1986.
Yardeni believes these cross-market moves underline the likelihood of further short-term volatility, even as the longer-term outlook for equities remains constructive.
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