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There’s One Helluva Disconnect Buried In Wall Street’s 2025 Profit Forecasts
A few days ago, I revisited "the enduring paradox" of an equities bull case built on rate-cut hype.
Long story short, there's an inherent tension between expectations for deep Fed cuts and buoyant risk assets. While it's by definition true that lower rates can buoy equity prices through the valuation channel, the macro rationale for rate cuts (i.e., the threat of recession) argues for slower profit growth. In order for the bull case to work, multiple expansion has to outpace lower earnings.
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Very nice. Spot on. We shall, obviously see the proof in the pudding, especially since 2025 will have a new administration in DC.
I had a devil’s advocate sort of thought, which I have no data to support, but will be keeping an eye out for –
Suppose the S&P 500’s revenue is disproportionately derived from the “haves” while the coming economic weakness will disproportionately (even more than usual) impact the “have nots”?
Bingo.
Or – the S&P500 companies are, by definition, the bigger, more profitable ones out of a vast ocean of mediocre, low profitability businesses out there.
Another thought – you can cut rates to sustain economic activity, sure… but it’s not forbidden to cut rates just coz inflation is back on target and you don’t need to keep rates high to choke it off.