"If the fed makes a mistake and cuts rates," the S&P will mellt up, and ‘blow right through 5,400’ with easing in July or September, per Ed Yardeni

"If the fed makes a mistake and cuts rates," the S&P will mellt up, and ‘blow right through 5,400’ with easing in July or September, per Ed Yardeni.

The concept of the "Fed Put," or the belief that the Federal Reserve will intervene to support the stock market with interest rate cuts at any sign of economic weakness, has resurfaced after Fed Chairman Jerome Powell suggested last month that the next interest rate move is likely to be a cut rather than a hike.

"Investors' expectation that the Fed would preemptively ease to prevent a recession means that the Fed Put is back," Yardeni told clients in a note on Tuesday. "Its return lowers the risk of a recession and a bear market, but it increases the risk of a stock market melt-up."

Ultimately, the anticipation of monetary easing by the Fed through interest rate cuts, whether they materialize or not, could spark a new wave of investor optimism, driving the stock market significantly higher.

Yardeni himself predicts the S&P 500 will reach record highs by the end of the year at 5,400 and suggests the index could climb as much as 25% to 6,500 by 2026.

"We don't foresee any recession this year that the Fed would need to address by easing. But since some investors believe it might happen, the Fed Put is back. With it comes an increased risk of a stock market melt-up," Yardeni said.

Supporting Yardeni's bullish outlook for stocks, and the potential for an unsustainable market boom, is the fact that earnings expectations continue to rise following better-than-expected first-quarter results.

Wall Street analysts now project S&P 500 earnings growth of 10.1% this year, accelerating to 13.9% in 2025 and 11.8% in 2026, reflecting a growingly optimistic outlook for corporate profits.

"As we've often observed in the past, if the odds of a recession are low, then S&P 500 forward earnings are a very good leading indicator of actual earnings," Yardeni explained. Rising earnings are what ultimately drive stock prices higher in the long term.

However, the increasing risk of a stock market melt-up is accompanied by the risk of a subsequent sell-off, as melt-ups are rarely sustainable and are usually followed by a swift and painful decline.

For investors, the question is whether a potential stock market melt-up and subsequent decline will occur at significantly higher or lower prices from current levels.