Why the Stock Market Is in the Perfect ‘Goldilocks’ Scenario

• The stock market is in the perfect sweet spot to move higher, market vet Ed Yardeni said.
• The Yardeni Research president pointed to three signs the US is in a “Goldilocks” economy.
• That’s a perfect scenario where inflation falls while economic growth remains robust.

Stocks look like they’re in the perfect scenario to rally even higher, according to market veteran Ed Yardeni.

In a recent note, the Yardeni Research president pointed to three signs that the economy looked to be entering the ideal “Goldilocks” scenario that was just right for the stock market to flourish. Economic growth is neither running too hot nor too cold — meaning the US looks poised to avoid a recession while inflation cools to the Fed’s 2% target.

That’s great news for investors. The Fed is keeping an eye on inflation and economic growth as it looks poised to lower interest rates this year, a move commentators have said could spark a big rally in the stock market.

“Like Goldilocks’ preferred porridge, it is considered neither too hot nor too cold, but just right — and therefore bullish for stocks,” Yardeni said of the economy.

Here are three things Yardeni sees that show stocks are in the ideal environment to keep climbing.

1. The job market remains robust

Jobless claims have ticked higher, but the unemployment rate still remains near a record low. The January non-farm payrolls report blew past expectations, showing that US employers added 353,000 jobs last month.

Jobless claims over the last week remained steady at around 215,000, which suggests February unemployment will remain below 4%, Yardeni said. Markets will get the next non-farm payrolls report next Friday, March 8. 

2. Inflation is cooling

Inflation has been dragged lower since notching a 23-year-high in mid-2022. Consumer prices rose 3.1% in January January. That’s higher than markets were expecting but far from a meaningful reacceleration. Meanwhile, personal consumption expenditures inflation, the Fed’s preferred inflation measure, climbed 2.4% year-per-year, in line with economists’ expectations.

Markets are also feeling pretty confident inflation will slump lower. One-year inflation expectations have fallen to the 2% range since the start of 2024, according to Fed data.

3. Businesses feel good about the economy

Businesses saw a “sharp rebound” in sentiment over the last month, Yardeni said. Firms are the most positive they have been in nearly two years, according to regional surveys conducted by the Fed, with expected business activity ticking to a level of 30 in February, up from just 1.9 in October.

“This confirms our view that the rolling recession in the goods sector of the economy is bottoming,” Yardeni said.

Yardeni has sounded off on the strength of the US economy for months, calling the current climate a rendition of the “roaring ’20s.” Previously, he predicted the S&P 500 could notch 5,400 by the end of the year, implying a whopping 17% return for the benchmark index.