The prospects for rapid, deep Fed cuts are diminished following last week’s dramatic upside US payrolls surprise.

Markets have ruled out a second consecutive 50bps rate cut at the November FOMC meeting. Traders were even beginning to evidence caution around a 25bps cut at the next policy gathering. A quarter-point move on November 7 was priced as less than a sure-thing.

For 2024 as a whole, market pricing reflected fewer than 100bps of easing on Monday in the US for the first time since before the late-July / early-August growth scare.

Do note: The figure above includes September’s 50bps cut. So, fewer than 100bps priced means markets are now fading the median 2024 dot.

In betting markets, “no change” at the November meeting was bid as low as ¢4 post-September FOMC. On Monday, those bids were approaching ¢18.

It’s tempting to suggest another hawkish repricing of the US rates trajectory could be disruptive to equities which were assuming a deeper rate-cut trajectory, but remember: Aggressive rate-cutting cycles aren’t historically associated with buoyant corporate profits for obvious reasons. If the Fed’s cutting aggressively, something’s usually gone wrong, and whatever that something is almost invariably spells trouble for corporate bottom lines.

SocGen’s Andrew Lapthorne is adamant on that point, and he reiterated it in his latest on Monday. The familiar figure below tells the story for anyone who might’ve missed it previously.

“Our position is that historically, 200bps of cuts has gone hand-in-hand with double-digit drops in profit growth and therefore we caution that lower interest rates may mean disappointing [earnings] and all that implies, most notably, higher equity volatility and credit spreads,” he said.

The counter-argument’s easy enough to make: The Fed’s not cutting to combat a recession, and the reason the cutting cycle may be so pronounced isn’t that the economy’s headed off a cliff or that officials are wary of some heretofore under-appreciated systemic risk, but rather because due to the extraordinary nature of the inflation overshoot, the terminal rate ended up being so far above neutral that deeper cuts are required simply to recalibrate policy in light of the progress made on restoring price stability.

Lapthorne readily acknowledged that argument, calling it “perfectly reasonable push back.” But he encouraged investors not to forget that “sales growth is nominal.”

The figure above shows top-line growth for corporate America plotted with headline CPI measured on a 12-month basis. The familiar implication: Sales growth necessarily recedes with price growth.

“Within the 2% inflation target there will be both price makers and price takers,” Lapthorne went on. “And falling sales growth often goes hand-in-hand with declining profit margins.”

So, fair warning, I suppose. If you’re the glass half-full type, you might suggest we’re on the cusp of a win-win-win scenario, wherein inflation falls enough to justify ~150bps of cuts, but not so much as to erode pricing power any further, while a resilient labor market ensures that anyone who wishes to be gainfully employed can be. And what are workers when they aren’t working? They’re consumers.

Happy times? Goldilocks? Maybe. Here’s hoping. And certainly, if the Fed does deliver even 150bps of cuts in an environment where aggregate SPX EPS growth comes anywhere near the 14% bottom-up consensus for 2025, it’d be hard to argue the bear case.

As Lapthorne put it, “if profit growth remains as strong as forecast (double-digit both this year and next) and the cost of money is going down, then why not be bullish?”