No doubt about it. A soft-landing would be way better for the economy than a poke in the eye with a sharp stick. No big spike in unemployment. Decent growth in real personal incomes. Controlled and relatively low inflation. Real interest rates falling–slowly–from their current historically high levels.

It would be a huge positive achievement if the Federal Reserve could engineer a soft landing after raising interest rates to slow the economy and cut inflation and then beginning to reduce interest rates to make sure that growth didn’t slow too much or too quickly.

A huge positive for the economy.

I’m not sure that an economic soft landing is quite so big a positive for the stock market.

An economic soft landing, in fact, poses a big problem for a stock market trading at record highs, even after the selling that now seems to have ended. And where individual stock valuations are way above historical norms.

Those higher valuations are justified by two factors.

First, there’s projection that the Federal Reserve will cut interest rates not just once in Swptember of 2024, but repeatedly. Twice for a 50 basis point total move in 2024–or more–and then again by other 100 basis points in 2025. That big a decrease in interest rates would be a huge boon for stock prices–and certainly for economic growth as well.

Second, there’s a projection of continued high rates of growth in revenue and earnings. Wall Street is projecting a strong acceleration of growth in the second half of 2024 with earnings for third quarter projected to growth by 8.6% year over year and by an astounding 14.4% in the fourth quarter. (I can actually find even higher estimates of projected growth–as high as 19.8%–for the fourth quarter.)

But what if the soft-landing scenario jeopardizes either of those rosy assumptions?

On growth, I can certainly, find forecasts for double-digit earnings growth again for 2025. The top of the range of projections for 2025 is around 14%.

But the bottom of the range in projections for 2025 is around 8%. Now 8% earnings growth for the stocks in the S&P 500 is by no means a recession. 8% would be very solid earnings growth indeed. But 8% is quite a bit less than 14%. And it would mark a significant slowdown from growth in the last quarter of 2024.

Will 8% growth that’s a significant slowdown in earnings growth support stock prices at current highs?

The answer is likely to be Yes. If the Federal Reserve delivers the big interest rate cuts in 2024 and 2025 that the market now hopes for.

The clear trade off here is that big interest rate cuts would balance out–or more–a slow down to a still very healthy earnings growth rate of 8% or so.

But what if the soft-landing scenario doesn’t include interest rate cuts of 50 basis points in 2024 and another 100 basis points in cuts in 2025?

Then, I think, we don’t get the required balance of slower growth and big rate cuts–the assumptions in the soft-landing scenario for stock market bulls.

And I can think of a number of things that would lead the Federal Reserve to make less than that minimum of 150 basis points in interest rate reductions. Global political crises in the Middle East, Ukraine, or Taiwan. A deadlock in the U.S. Congress on tax cuts and funding the national debt. Political violence after the November election. A reluctance on the Fed’s part to cut rates so quickly that it risks reigniting inflation.

What worries me about the soft-landing scenario–for stocks–is that the margin for error is just so small. I certainly can’t see a reason for taking on risk right now–even as the rally of the last 8 sessions seems to say that investors and traders as a whole feel it’s “risk-on” again.

More on this–an what to do about it–in posts later this week.