The current economic dispute is whether the economy will have a hard or soft landing. A hard landing means economic recession. A soft landing is the perfect outcome for investors because the economy would slow, which alleviates the need for higher interest rates, but wouldn’t slow enough to hurt earnings. Many have called the soft landing scenario the “Goldilocks” outcome because the economy would not be too hot nor too cold.
Our view has been that the economy isn’t actually landing. Furthering the airplane metaphor, we see profits taking off. The data increasingly suggests that investors should fasten their seatbelts, make sure carryon items are placed under the seat in front of them, put their tray tables in the upright and locked position, and be sure their seatbacks are upright because corporate profits are accelerating and the overall economy looks set to remain quite healthy.
Despite profits growth becoming more abundant, investors generally continue to focus on the so-called Magnificent 7 stocks. Such narrow leadership seems totally unjustified and their extreme valuations suggest a once-in-a-generation investment opportunity in virtually anything other than those 7 stocks.
Profits cycle has troughed
Over the past 30 years we have consistently emphasized the importance of profits cycles relative to economic cycles because equity markets are more influenced by profits than by overall economic growth.
Chart 1 shows our forecast for the global profits cycle through mid-2024. Although global markets experienced a profits recession heading into 2023, it increasingly looks like global profits growth during 2024 will be healthy.