Well, how does €˜no landing’ sound?
Over the past 12 months, economists and investors alike have debated about whether the Fed’s rapid rate-hiking campaign would lead to a €˜hard landing’ for the U.S. economy (wherein high rates hobble economic activity and create a recession) or a €˜soft landing’ (wherein high rates slow the economy enough to kill inflation but not economic activity).
Throughout most of 2023 and into early 2024, the €˜soft landing’ camp gained steam. That’s why stocks have been in all-out rally mode since late 2022.
However, in recent weeks, an alternative €˜no landing’ outcome has suddenly gained traction. And its emergence is likely to blame for the stock market’s recent struggles.
In this €˜no landing’ scenario, the U.S. economy avoids a recession, but inflation doesn’t fall back to 2%. That would create a situation wherein we have a growing economy with stubborn inflation around 3% and a Fed that keeps rates high indefinitely.
The likelihood of that outcome has grown in recent weeks.
After falling consistently throughout 2023, inflation has flatlined around 3% here in 2024. Similarly, the economy has also flatlined after improving throughout the past year. And now, despite discussing rate cuts, it looks like the Fed may just keep rates where they are for the foreseeable future.
If those trends persist, then we will get “no landing” for the U.S. economy.
In that situation, a particular group of stocks will win big: growth stocks.
Earnings Growth Should Juice Growth Stocks Big-Time
After all, in a no landing situation, one major tailwind emerges for the stock market – earnings growth.
That is, if the economy continues to grow without a recession, then that growth will inevitably flow into corporate earnings. Profit growth trends will improve meaningfully.
And indeed, we’re already seeing this. Across the entire S&P 500, earnings estimates for 2024, €˜25 and €˜26 have risen meaningfully. Analysts are suddenly projecting that earnings will rise 12% next year and 9% the year after that.
That’s really good earnings growth.
And in a €˜no landing’ outcome, the stocks driving all that earnings growth will be Wall Street’s big winners.
Of course, that means that if you’re betting on a €˜no landing’ outcome for the economy, it’s best to invest in the biggest earnings growers right now.
Where are those stocks hiding?
Per our analysis, the sectors seeing the biggest earnings growth and most positive earnings revisions right now are tech stocks, including semiconductor, internet media, software, and even biotech stocks.
If you’re betting on a €˜no landing’ outcome for the economy, you need to be invested in those stocks.
The Final Word
Now, as for us, we still like the odds of a soft landing.
The economy is proving resilient, but under the hood, cracks are forming. Soon, it will require the Fed’s assistance to avoid a recession.
Meanwhile, inflation is proving resilient at 3%. But we think that as lagging shelter inflation is reflected in the numbers, it will fall to 2% throughout the rest of 2024.
And for its part, the Fed has continued to pound the table on three rate cuts this year. And if it follows through on that guidance, it will put us on track for a soft landing.
Therefore, a soft landing is still the most likely outcome for the economy. But a €˜no landing’ outcome is gaining traction.
Either way, soft landing or no landing, growth stocks should win big.
The investment implication? It’s time to buy growth stocks.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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