Over the last week, overdone fears about the economy have once again been starting to creep into business news reports and negatively affect stocks. Specifically, some nervousness about inflation, interest rates, stagflation, corporate earnings, and stock valuations appear to be negatively affecting investors’ sentiment. But a closer look at each of these issues shows that the worries about them are unwarranted. As a result, I remain convinced that the economic expansion remains very strong, while the long-term outlook of stocks is quite positive. Let’s take a look at each of these areas of my stock market outlook.

Inflation and Interest Rates

Renowned economist Ed Yardeni, whose calls about the macro economy and the stock market have been quite accurate over the last few years, told CNBC on March 13 that “Excluding shelter, the CPI is already at 2%….and shelter inflation is coming down.” Of course, the CPI, or Consumer Price Index, is a very widely used method of measuring inflation. Moreover, Yardeni was speaking after February’s CPI data was released on March 12. Also importantly, the Fed’s inflation target is 2%.

So Yardeni is saying that, excluding shelter prices, inflation has already reached the Fed’s 2% target. Moreover, as I pointed out in a past column, the shelter component of the CPI is extremely distorted and is currently far higher than shelter inflation is in reality. This is a key part of my stock market outlook.

That’s because the government incorporates the ridiculous concept of “owners’ equivalent rent,” which nobody actually pays, into the shelter component of the CPI. Therefore, it’s quite possible that ,even including actual shelter costs, inflation is currently quite close to the Fed’s target.

Given this situation, the Fed is quite likely, as I’ve noted in past columns, to begin cutting rates either in May or June.

Also noteworthy is that the Fed has two other, major reasons to cut rates. First, as I’ve noted in past columns, Fed members, like other Washington bureaucrats, are anxious to help President Joe Biden win his reelection bid against former President Donald Trump. And secondly, lower rates help make America’s huge federal debt, which is growing very rapidly, much more manageable.

Stagflation, Corporate Earnings and Stock Valuations

In the previous section, I explained that inflation is not a major problem at this point since it’s approaching the Fed’s 2% target. Therefore, the “flation” component of stagflation does not appear to be an issue for now.

Meanwhile, multiple signs indicate that the economic expansion remains very much strong and intact. First, the Fed, using many economic data points, estimates that the economy will grow at a rather strong annualized seasonally adjusted rate of 2.3% above inflation this quarter. Also boding well for the economy is the Fed’s estimate for gross private domestic investment to climb at an annualized 3% above inflation this quarter. Increases in private investment tend to lead to more hiring. And increased hiring, in turn, leads to higher consumption by consumers, and it is the latter metric which primarily drives the U.S. economy.

Further, Ed Yardeni, the well-regarded economist with the good track record whom I referenced earlier, does not expect a recession to occur either this year or next year.

Moreover, also boding well for the economy and stocks, Bank of America recently raised its 2024 and 2025 earnings per share estimates for the S&P 500 to $250 and $275, respectively. On the valuation front, if we use the price-earnings ratio for the index that was in place in June 2017 of 23.3 times, along with the bank’s EPS estimate, we get a 2025 S&P 500 target of 6,407. That’s way above the index’s current level.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.