In August, Ed Yardeni held the highest year-end target for the S&P 500 on Wall Street at 8,400.

This week he cut it to 7,900.

Nothing broke in corporate earnings. What changed is the price of money.

The Fed Hiked, And The Bar For Another One Is Low

The Federal Open Market Committee raised the federal funds rate by 25 basis points on Wednesday to a target range of 3.75% to 4.00%. The vote was unanimous, 12-0. It was the first increase since July 2023.

Fed Chair Kevin Warsh was blunt at the press conference.

“The plain fact is that inflation is too high and has been for too long,” he said.

The Summary of Economic Projections, the quarterly grid where each official pencils in where they think rates are headed, pointed to one more hike before year-end.

Four participants penciled in a third. No cuts are projected for 2027, and inflation is not forecast to return fully to the 2% target until 2029.

Yardeni read the move as deliberately open-ended rather than a one-off adjustment.

Growth is strong, the labor market is at full employment, and Warsh himself declined to describe financial conditions as restrictive.

With that combination, the case for further hikes remains alive unless inflation clearly cools.

The Dow Jones Industrial Average, tracked by the SPDR Dow Jones Industrial Average ETF (DIA), fell 1.21% Wednesday. The S&P 500, tracked via the SPDR S&P 500 ETF Trust (SPY), slipped 0.45%, and the Nasdaq Composite closed flat.

Higher Yields Compress Stock Multiples

The mechanism behind Yardeni’s year-end target reduction for the S&P 500 is a three-step chain.

First, the 10-year Treasury yield closed Wednesday at roughly 5.01%, its highest level since 2007.

Second, a higher risk-free yield makes government bonds more competitive with stocks.

Third, investors respond by paying less for each dollar of expected corporate profit.

Yardeni lowered his year-end forward price-to-earnings multiple for the index to 18.6 times from 19.8 times. Applied to unchanged earnings, that alone removes 500 points from the target.

He also raised the probability of his bearish scenario to 30% from 20%, trimming his “Roaring 2020s” base case to 70%.

“The risks of a downturn have increased over the next three to six months,” he wrote. His old 8,400 target now sits in mid-2027.

The Economy Is Not The Problem. Energy Is.

The data released alongside the decision made the case that demand is accelerating, not fading.

August retail sales rose 1.2% month over month against expectations of 0.8%. The control group used to calculate gross domestic product jumped 1.4%, versus the expected 0.5%.

The Atlanta Fed’s GDPNow model lifted its third-quarter growth estimate to 5.1% from 4.4%.

The inflation side is where the pressure sits. Import prices rose 7.0% year over year in August, the fastest since 2022.

Excluding petroleum, they still rose 5.5%. Imports from Hong Kong, Singapore, South Korea and Taiwan surged 12.6%, reflecting AI-related demand for chips, servers and memory running ahead of supply.

Brent and West Texas Intermediate crude both trade above $100 a barrel, each up more than 20% over the past month as the conflict with Iran continues.

Friday In Tokyo May Matter More Than Wednesday In Washington

Yardeni flagged Japan as an additional risk. The Bank of Japan is expected to raise its policy rate by 25 basis points to 1.25% on Friday.

Higher Japanese rates and a firmer yen unwind the carry trade, in which investors borrowed cheaply in yen to buy higher-yielding bonds elsewhere. Unwinding it forces selling of those bonds, including Treasuries.

Yardeni’s revised target still implies roughly 4% upside from Tuesday’s close of 7,585.73.

The disagreement with his August self is about the multiple and the timing, not about the direction of corporate profits.