Opinion: ‘We remain in the soft-landing club’: Strategist Ed Yardeni’s bullish scenario puts S&P 500 up more than 20% by end of 2023


We think we coined “rolling recession” back in the mid-1980s to describe the U.S. economic slowdown that many feared would turn into an economy-wide recession. We think the phrase accurately describes the performance of the U.S. economy since early last year. It’s similar to a “growth recession,” “midcycle slowdown,” and “soft landing,” but includes the concept that different areas of the economy are experiencing the slowdowns at different times.

We think we were among the first to raise the possibility of the “no landing” scenario for this year. Here is what we wrote on Jan. 9 about this now possible scenario: “There will be no landing for the economy this year. Instead, real GDP will grow by 2.0% or more. Inflation will moderate without a recession down to 3%-4% based on the PCED measure of consumer prices. By the end of this year, it will be closer to the bottom end of this range.”

Nevertheless, the soft-landing scenario remained our most likely outlook. Then came January’s strong batch of economic indicators during the first two weeks of February. On Feb. 6, we wrote: “Last week, there were more no-landing economic indicators than either soft-landing or hard-landing ones. … Debbie and I don’t recall a happier batch of economic indicators than the ones that came out last week.”

Suddenly, we along with lots of other economists and strategists had to assess the odds of no landing.

Previously, we had been assigning subjective probabilities of 60% to a soft landing and 40% to a hard landing. We tried to keep things simple last year, but we have to acknowledge that there are now four possible scenarios for this year:

1. Soft landing (40%): In the soft-landing scenario, U.S. economic growth slows to a crawl this year, with real GDP rising around 0.5%-1.5%. The PCED inflation rate moderates to 3.0%-4.0% this year and is closer to the bottom end of this range by year-end. The Federal Reserve raises the federal funds rate two more times, by 0.25% each time, to 5.00%-5.25% and leaves it there through the end of this year. The 10-year Treasury bond
yield this year remains below the 4.25% at which it peaked last year. The S&P 500
rises to 4500 this summer and closes the year at a new high of 4800 as investors anticipate stronger earnings in 2024. S&P 500 earnings per share rises to $225 this year from $215 last year, and investors discount $250 in 2024 by the end of this year. Life is good.

2. Disinflationary ‘no landing’ (20%): In this version of the no-landing scenario, real GDP rises around 2.0%-3.0%. However, inflation continues to moderate. Productivity makes a comeback. Price inflation falls faster than wage inflation so real wages increase, providing consumers with more purchasing power as employment gains slow. The Fed continues to hike the federal funds rate in 0.25% increments. The terminal federal funds rate rises to 5.50%-5.75% by mid-year and remains there through year-end. The 10-year Treasury yield rises to 4.50%-4.75%. The S&P 500 is range-bound between 4000 and 4500 most of the year. The earnings outlook is at least as good as in the soft-landing scenario, but higher interest rates weigh on valuation multiples.

3. Hard landing (20%): In this scenario, an official recession occurs. As we’ve noted before, if that happens, it will be the most widely anticipated recession of all times. Hard-landers keep pushing it out as their dire predictions don’t pan out, especially now that the no-landing scenario has made a surprising comeback as a result of January’s stronger-than-expected economic indicators.

A hard landing has been mostly promoted by stock-market bears who believe that last year’s bear market isn’t over and has another leg down this year to a new low, maybe before midyear, in anticipation of a recession during the second half of 2023. If that doesn’t happen, there is always the first half of 2024 or the second half of 2024. A hard landing may be an inevitable result of the lagged effect of the Fed’s extraordinary monetary tightening last year. Or it could result because the Fed makes the classic mistake of overdoing what it has done so far.

4. Inflationary ‘no landing’ (20%): The new version of the hard landing is that inflation either persists or rebounds because there is no landing. This may be the most bearish scenario of all because Fed officials would have to raise interest rates much higher as they conclude that only a recession can bring inflation down. In other words, the inflationary version of the no-landing scenario would simply be the long way to a hard landing, resulting in an even deeper recession and more bearish outlook for stocks.

Our bottom line: The first two scenarios add up to a 60% subjective probability, in our opinion. They are optimistic outlooks for the economy and bullish for stocks and bonds. The second two scenarios add up to 40% subjective probabilities, in our opinion. They are pessimistic outlooks for the economy and bearish for stocks.

The Fed’s bottom line: The party line at the Fed has called for a soft landing according to the FOMC’s December 2022 Summary of Economic Projections (SEP). Real GDP was expected to rise 0.5% in both 2022 and 2023 followed by 1.6% and 1.8% growth in 2024 and 2025. The longer-run trend of growth was deemed to be only 1.8%. The PCED inflation rate was expected to fall from 5.6% in 2022 to 3.1% this year, 2.5% next year, and 2.1% in 2025. The longer-run trend of inflation was judged to be 2.0%. The federal funds rate was expected to rise to 5.1% this year and fall to 4.1% and 3.1% over the next two years, closer to its longer run rate of 2.5%. (See our handy FOMC Economic Projections.)

The next SEP will be released on March 22. Between now and then, there will be releases for February’s CPI and employment and plenty of other economic and financial indicators that are likely to influence the next SEP. January’s economic indicators suggest that Fed officials will stick with their soft-landing scenario but will signal that it might take a higher-for-longer trajectory for the federal funds rate to get there. However, February’s batch of economic indicators collectively might favor one of the other four scenarios.

For now, we remain in the soft-landing club and have applied for membership in the disinflationary no-landing one.

Ed Yardeni is president of Yardeni Research Inc., a provider of global investment strategy and asset-allocation analyses and recommendations. This article is excerpted from QuickTakes, a service of Yardeni Research.

Institutional investors may sign up for a free trial to Yardeni’s research service. Follow him on LinkedInTwitter and his blog.

Read more: ‘We’re all bracing for impact.’ Most Americans think a recession is already here.

Plus: The stock market is just taking a breather after January’s monster rally. These stocks and ETFs can power the next leg up




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