Soft landing evidence in the US just keeps piling up.
Or at least that’s one way to characterize still-robust macro data and what looks like an inflection in profit growth headed into 2025.
Generally speaking, Wall Street expects double-digit EPS growth from corporate America next year, a result which at least a few skeptics argue is inconsistent with the notion that the Fed will keep cutting rates.
For now, consensus still sees the two — i.e., additional rate cuts and strong earnings growth — as compatible, or at least not mutually exclusive. But we’re starting to hear something that sounds vaguely like trepidation among Fed officials about the feasibility of delivering additional easing when core inflation’s still warm and Americans are still spending.
In any case, the figure below, from Morgan Stanley’s Mike Wilson, erstwhile bear, illustrates the re-acceleration in profit growth.
“S&P 500 EPS growth tends to either make a durable trough at ~0% or at -15-25% [with] the key differentiating factor whether a labor cycle hits the economy,” Wilson wrote.
The dashed-circles in the chart denote cases when the US did experience a labor cycle, and the solid circles when it didn’t.
“The inflection in growth we are currently seeing is off the zero bound and wasn’t preceded by an unemployment cycle [so] it represents a soft landing, in our view,” Wilson went on, adding that late-cycle earnings growth re-accelerations are “typically driven by some feature unique to that particular cycle.”
He walked back through recent examples. In the late 90s, the “unique feature” was tech equipment spending. In 2016, it was a rekindled global growth impulse (coming out of the China devaluation scare and a concurrent manufacturing mini-recession) punctuated, in late 2017, by the Trump tax cuts.
In the current episode… well, you know the story in 2024. It’s about AI. “The EPS growth recovery has largely been driven by a narrow set of large-cap, quality companies benefitting from AI capex, cost cutting and/or operational efficiency,” Wilson wrote.
