Ed is a born optimist - which I very much appreciate since so many "gurus" are permabears. He is betting on soft landing, which is the mainstream thinking as well. The crowd is right more often than not.
However, it is important to distinguish between the economy and the stock market. There are two macro arguments for being bearish on the stocks, even if we get a soft landing:
The first is that the valuations between the stock indexes and the bonds are way way off. The indexes can keep climbing in valuations, provided 2 things happen: (A) their earnings keeps growing, and (B) the breadth improves. As it stands, the first is dubious and the second is abysmal. Equal weight SPX is negative for the year and SPX-493 is flat.
The second argument for the bears is dynamic. They (the smart ones anyway) argue that in order for the Fed hikes to have the desired effects the purchasing power needs to recede. This will come in one of two ways: either stocks have to fall, because so long as they don't people can just sell equities to buy more stuff. Or the interest rates have to remain elevated long enough to deplete bank accounts to the point of curtailing spending, which in turn will mean the earnings can't grow and then the stocks will fall.
There is a path to soft landing, which is what Ed is describing. But it seems unlikely. This is what is priced into the market right now:
12% EPS gains for 2024 and 25% EPS gains into 2025
Oil ~70 and remaining there beginning fairly soon.
3 rate cuts starting June of 2024.
Importantly, the EPS gains are expected to arrive from margin improvements rather than revenue increase.
This, the macro bears would tell you, is a very tall order and unlikely to happen.
As to the debt crisis itself, it is still unlikely. I've seen people who've done the math and it should be revisited in 6 months or so, but at this time it is not likely. What seems more likely to me, and this is my personal opinion, is that the high US rates and USD strength will crack the FX markets - most likely in EU and/or Japan. Atypically, the EM may fare better and become a better investment than DM. |
