Those of you old enough (or, as a reader once joked, while putting her own spin on one of my favorite quips, young enough) to remember two months ago, might recall BofA’s Michael Hartnett saying it’d be “so ‘on-brand’ for stocks to melt-up into recession — suck ’em all in right before the hard landing.”

Fast forward to July, and we have in fact seen an equity melt-up. But we haven’t seen a hard landing. The US economy has, if anything, reaccelerated.

Growth in Q2 was stronger than expected, firms are building factories at the fastest pace in decades and consumers, feeling much better about things, are still spending. At the same time, the pace of compensation cost increases is receding and inflation is too. The Goldilocks narrative is enjoying a summer renaissance.

But what if it’s a trap? The current zeitgeist, Hartnett said in the latest installment of his popular weekly “Flow Show” series, can be summed up as follows: “It would be so ‘2020s’ for the economy to hit a brick wall” just as everyone throws in the towel and otherwise “punts” ostensibly defunct macro assumptions into 2024.

He described the “nominal bull.” The 37% rise in US nominal GDP since the COVID panic lows represents “the most explosive expansion since World War II,” Hartnett wrote. Of course, “strong nominal GDP equals strong revenue growth,” which in turn means higher earnings. It’s “simple,” he said.

It is “simple.” But not “simple” enough to be fully appreciated on Wall Street, where a majority of top-down strategists didn’t anticipate this year’s run up in equities.

Although the US did succumb to an earnings recession, it’s been shallow. And three quarters of companies reporting so far for Q2 have beat estimates.

Bears continue to argue that the inflation slowdown is a double-edged sword — that disinflation means less pricing power, slower top-line growth and, ultimately, lower earnings as costs stay high. With the usual caveat that the market doesn’t assign a trough multiple to trough earnings, additional downside for profits would be set against this year’s meaningful re-rating, a perilous juxtaposition were it to materialize.

Hartnett pointed to this year’s valuation-driven rally and explained what, in his view, is now baked in. “Multiple expansion discounts ‘Fed done’ and Fed cuts in 2024,” he said. That’s possible, but it’s not a foregone conclusion.

The table above gives you a sense of what you’d need to posit in terms of earnings growth, and what multiple you’d need to assign, to rationalize various SPX levels.

In order for the Fed to be done, Hartnett said you’d need “much slower wage growth, driven by high immigration or perhaps magically tied to A.I.” Needless to say, “magical” thinking around A.I. is itself a catalyst for this year’s re-rating, and not just because investors are calmly and rationally assessing the implications of the new technology for productivity.

The “trading risk” over the next four to six weeks, Hartnett went on, is tighter financial conditions. But over the next four to six months, the “bear risk” is “simply that [the US] economy is weaker than expected.” That’d be an unwelcome development for a market which, in Hartnett’s telling, believes in a “new ‘steady state’ of permanently high nominal GDP and EPS upside.”