'Rational exuberance' rules stock market: Yardeni

Europe weak, China slowing, US stands out: Yardeni
Europe weak, China slowing, US stands out: Yardeni   

After the pounding that small-cap stocks have taken, the broader market is likely to see gains through this year and next, market strategist Ed Yardeni said Wednesday.

Yardeni, who said in July that the bull market appeared to be in the fourth and final stage of its rally, said that stocks now appear to be in a period of "rational exuberance."

"Maybe there's a fifth stage after this one, for all I know," he said. "It doesn't feel all that exuberant now when you look at the small-cap stocks that have taken quite a crush over the past few days and, really, since the beginning of the year. But that's been after they've had an enormous rally last year, so I agree with the idea that this market's come a long way. And it may just go sideways the rest of the year, but then next year I think we're going still higher."

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Yardeni, who is president of Yardeni Research, wrote in a note that "rational exuberance" had a 60 percent chance of winning out, with the S&P 500 rising to 2,300 by the end of next year. He has an S&P 500 price target of 2,014 for 2014.

On CNBC's "Halftime Report," Yardeni also brushed off the idea that Alibaba's IPO—history's largest—marked a peak for the market.

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"I think the top will be made when there's convincing evidence out there that recession is imminent, and I don't see that the Alibaba story is going to mark the top in terms of that kind of scenario," he said.

The United States remained the best global investment story against a backdrop of economic weakness in Europe and Japan, Yardeni added.

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"The U.S. actually stands out in a world that's slowing down," he said, also citing the benefit of lower commodity prices. "I think the outlook for the economy in the U.S. is for it to continue to grow, the global economy to grow slowly and earnings will grow in that environment."

As for the Russell 2000, which exhibited a so-called death cross this week, Yardeni said that shifting investments could be the cause.

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"I think what you're seeing here is what I call an internal correction, where investors are moving from high P/E to low P/E stocks," he said, adding that global investors could be further exacerbating the disparity between the S&P 500 and the Russell 2000.

"Global investors are probably not going to be buying small-cap stocks. They're probably going to be buying some of the larger-cap names that they recognize," he said. "And maybe that also explains some of this performance divergence."