Market Views: Is the US economy poised for a soft landing?
As earnings season begins and major investment banks and technology firms beat earnings estimates, financial markets are increasingly betting on the US economy making a soft landing amid a rate-cutting cycle.
Starting last week, Wall Street banks such as JP Morgan and Morgan Stanley and chipmaker Nvidia delivered strong earnings for the third quarter, buoying confidence that the US economy could avoid sliding into recession.
Corporate revenue growth in the second quarter came in at 1.1%, while earnings before interest, taxes, depreciation and amortisation (EBITDA) was positive for the first time in five quarters, according to JP Morgan data as of June 30.
The bank, which released better-than-expected earnings on October 11, stated that lenders’ strong earnings were consistent with a soft-landing scenario.
So far, cooling inflation and healthy macro data are also supportive of that view.
However, investors remain cautious due to potential risks from the US presidential election, the Middle East conflict, as well as any possible cracks in the world’s largest economy.
AsianInvestor asked a host of fund houses on what they think of the US economic outlook, earnings season, and the biggest risks ahead.
The following responses have been edited for brevity and clarity.
Christian Mariani, US equity investment specialist
JP Morgan Asset Management
Our base-case scenario for the US economy remains a soft landing, with expectations of positive, trend-like growth supported by stable financial conditions, contained inflation, and a solid earnings backdrop as we approach 2025.
However, an economy expanding at a slower pace is more vulnerable to external shocks. Geopolitical tensions and the upcoming US elections may also increase market volatility.
The good news is, with minimal excesses building in the cyclical sectors, the risk of an endogenous shock causing a recession remains low, and moderate consumer spending should continue to support trend-like growth into 2025.
For the upcoming Q3 earnings season, the S&P 500 index is expected to see earnings growth of about 4%, slightly better than anticipated last week due to strong financial sector results.
However, it is important to note that there is a significant bifurcation in earnings results– technology, communication and healthcare are experiencing strong growth, while energy and materials are expected to see negative year-over-year earnings growth.
The Magnificent 7 companies are expected to maintain strong earnings growth at 20% year-over-year, though this marks a deceleration from previous quarters.
While the remaining 493 companies in the S&P 500 are expected to have near-zero year-over-year earnings growth in Q3, we should see an acceleration in the growth of these companies as we move into Q4 and beyond, suggesting a broadening contribution to overall S&P 500 earnings.
All in all, while the US economy is on track for a soft landing, active management remains crucial given the heightened volatility and sector-specific dynamics in this evolving market.
Kristina Hooper, chief global market strategist
Invesco
There’s certainly evidence that the US economy appears to be in good shape, powered by high earners and strong corporate balance sheets.
A soft landing is indeed likely, and the market consensus is for earnings growth to exceed expectations which would be good for stocks.
I’m closely watching this earnings season for what it can tell me about the strength of the economy (or lack thereof), major risks, variance in different sectors and different consumer segments in the economy, as well as the outlook for the near term.
Although only 6% of companies in the S&P 500 have reported Q3 earnings, their transcripts still reveal some important learnings: both corporations and US consumers look like they are generally healthy, while higher-income consumers in particular are powering the economy, which is compensating for weakness among lower-income consumers.
The strength of the labour market is still the key to the overall health of consumers and more broadly in the aggregate economy, so I’m focused on any guidance on job cuts on earnings calls.
In terms of the economy in general, I will be looking to the upcoming US retail sales and industrial production figures, for confirmation of continued health in the economy.
The economic data has been positive recently, but we need to be vigilant in looking for cracks, especially in the labour market where any weakening would undermine the case for a soft landing.
Ross McSkimming, head of equities investment specialists, developed markets
abrdn
We anticipate a soft landing as the most likely scenario. In this outlook, US economic growth is projected to decelerate yet stay positive.
The US is expected to maintain positive growth dynamics, even as the labour market continues to cool.
Inflation rates in most economies are predicted to hover around target levels, although underlying inflationary pressures could persist, potentially keeping headline inflation rates elevated for an extended period.
Key factors such as the diminishing impact of savings surpluses, reduced immigration, and the tapering of fiscal stimulus are expected to contribute to the slowdown in US economic growth from its previous rapid pace.
Nonetheless, the economy is poised to sidestep a downturn, largely due to the atypical absence of traditional job destruction feedback loops in the current cycle.
There are a number of potential risks that could impact the US economy. The rising unemployment in the US and cracks in the labour market could lead to the US falling into recession.
The outcome of the election. If Trump is elected and he prioritises a trade war, implements immigration restrictions and eases fiscal policy, this could trigger a significant inflationary shock.
The situation in the Middle East could escalate, causing a potential surge in oil prices and additional disruption to global supply chains.
We believe that earnings for the S&P 500 reached their lowest point in 2023 and began to rise within the year. Following a relatively flat earnings growth in 2023, we anticipate the S&P 500 to experience high single-digit earnings growth in 2024, with global earnings expected to grow at mid-to-high single digits.
Globally, we think dividends will grow around 8% this year and will be supported by earnings growth.
Oliver Blackbourn, portfolio manager, multi-asset team
Janus Henderson Investors
For the time being, it looks like the US economy remains on track for a soft landing.
The labour market has loosened but layoffs have remained subdued. Consumers continue to benefit from good nominal wage growth, falling inflation and a significant wealth effect.
As a result, broad economic indicators remain solid, or even strong, with the Atlanta Fed Nowcast for Q3 indicating a 3.2% growth rate.
While it is possible to identify some more vulnerable areas, a wider view of the economy does not appear consistent with one on the edge of contraction.
At the highest level, interest rates remaining restrictive for too long remain a concern. Even after the jumbo start to the cutting cycle, the Fed has its foot firmly on the brake based on almost all estimates of the neutral rate.
While interest rates remain tight, there will continue to be risks.
More specifically, there is a clear potential for elevated mortgage rates to lead to a drop in construction employment, which could join manufacturing as an obvious interest rate sensitive point of pain.
The number of construction workers employed looks hard to justify going forward based on new projects being started.
Finally, the wealth effect looks to have buoyed consumer spending as the stock market and house prices have risen.
With the consumer now more exposed than ever to an expensive, concentrated equity market, there is a danger that a drawdown in just a small number of stocks could lead to a problematic contraction in spending and confidence.
Karan Talwar, client portfolio manager, public fixed income investment
Barings
It appears that the market worries about a near-term US recession may have been premature.
With the recent strong jobs number in the US, and ongoing strength in housing demand and retail sales, as well as a firmer recent inflation print, it appears that the economy may be stronger than some had expected, so a soft landing seems increasingly likely.
This also indicates that aggressive Fed action may not be necessary, and as a result, we have seen bond yields re-pricing higher in recent weeks.
The rise of geopolitical risk continues to ratchet higher with the escalation of the conflict in the Middle East, the ongoing war in Ukraine and the uncertain outcome of the US election.
While it is almost impossible to price in potential geopolitical tail risks, we remain cautious about the volatility that could be injected into markets on the back of any one of these situations.
The past few quarters of earnings releases have broadly indicated that companies remain in good financial health overall, with earnings growth taking place at a slow and steady rate that is in line with expectations.
As we look ahead, while there is likely to be some divergence across sectors, the changing interest rate landscape—even if slower than some had expected—should offer some relief to issuers, particularly those in more cyclical sectors like automotives.
Against a backdrop of overall fundamental strength and the robust US economy, we also see select opportunities in issuers in more challenged sectors that have already been through an earnings recession, such as chemicals and healthcare.
While it can be difficult to forecast the timing of individual credit turnarounds, many have good liquidity and are able to service their debt—and should ultimately benefit from central bank rate-cutting.