“With growth remaining subdued, the onus is on accommodative policy, ample liquidity and lower/contained interest rates to keep multiples supported,” Morgan Stanley’s Mike Wilson wrote Monday.

He was referring to the somewhat awkward juxtaposition between rich equities (following a re-rating over the last two months of 2023) and the mediocre outlook for the US economy, which is part and parcel of the soft landing narrative.

To be sure, subdued growth in 2024 wouldn’t be the worst thing in the world for stocks to the extent it keeps the Fed on track to cut rates. Indeed, there’s a very real sense in which the last thing equities need is a meaningful re-acceleration in the growth impulse, particularly in light of the Fed’s (for now token) allusions to “re-heating” risks associated with easier financial conditions.

Over the weekend, Lorie Logan reiterated the message from the December FOMC minutes. “A premature easing of financial conditions could allow demand to pick back up,” she said.

“Restrictive financial conditions have played an important role in bringing demand into line with supply and keeping inflation expectations well-anchored [but] over the past few months, long-term yields have given back most of the tightening that we saw over the summer,” Logan went on, adding that the Fed “can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions.”

All of that to say the “subdued growth” Wilson mentioned doesn’t just “put the onus” on incrementally accommodative policy, it’s a precondition for it. To get lower rates, you need the downward trajectory illustrated by the dashed yellow line in the figure below (projected CPI) to be realized, and that outcome is contingent on the deceleration exhibited by the dark blue line (projected real GDP).

As the chart header (Wilson’s) notes, consensus has coalesced around a likely soft landing, even as recession odds remain very elevated, a discrepancy Wilson explained by way of a few indicators which still telegraph a downturn, along with the prolonged curve inversion discussed here late last week.

“Several soft and hard macro data series remain depressed relative to history,” he wrote, flagging ISMs, consumer sentiment, industrial production, housing data and the Conference Board LEI.

Those indicators, Wilson said, have prevented consensus recession odds from receding to their historic norms.

Bloomberg’s roll up of forecasts still puts the chances of a US recession at a coin toss. The post-COVID high was 68%. Morgan Stanley’s economics team puts the chances at 30%.

If it feels to you like this is a delicate balancing act, you’re not wrong. Stocks, having nearly recovered record highs on the S&P, aren’t likely to get much help from growth in the near-term — either the economy will decelerate to the presumed detriment of earnings growth or the economy will re-accelerate, forestalling rate cuts to the detriment of elevated multiples.

The implication is that this only works if growth decelerates enough to keep inflation on a path lower and thereby the Fed on track to cut rates, but not enough to constitute a hard landing. You need just the “right” amount of economic deceleration. You need Goldilocks.

Wilson also sketched a scenario wherein nominal growth re-accelerates and inflation stays a modicum of elevated, but not enough to prompt another rate shock (or market panic).

“The loosening of financial conditions could stir animal spirits for individuals and companies, driving more spending/capex, hiring and M&A,” he wrote, adding that although rates could “rebound” in such a conjuncture as market participants trim bets on Fed cuts, rising rates and sticky inflation might not be so bad as long as “the growth backdrop is improving materially.” Cyclicals could do well, for example.

As the figure above shows, stocks can be amenable to rising rates if PMIs are improving.

“Equity returns tend to be strong when rates are rising if we’re in an accelerating growth environment,” Wilson said, noting that the equal-weighted S&P could outshine its cap-weighted counterpart in such a scenario given that stubborn rates and hotter growth could “offer less relative support for long duration stocks.”

So, to summarize: There are several possible macro-equity permutations for 2024. Sitting here right now, in January, it’s hard to know which one will ultimately define the year. In all likelihood, we’ll experience periods during which each possible permutation will define the near-term zeitgeist. Predicting the ebb and flow of the macro, and thereby the trajectory for equities, is difficult, where “difficult” should be read: “Impossible.”

I’ve said it before and I’ll keep saying it: When it comes to macro forecasting and index-level stock prediction, the old adage about your guess being as good as anyone’s can be taken 100% literally.