Policy- The US economy could be slipping into an expansion rather than a recession, according to Fundstrat's Tom Lee.
- Lee highlighted that earnings revisions for S&P 500 companies have started to turn higher.
- Earnings revisions typically plunge during recessions as analysts expect a slowdown in corporate profits.
Our Chart of the Day is from Fundstrat and highlights that analyst revisions for corporate profits in the first two months of the quarter are starting to turn higher for the first time in two years.
The positive earnings revisions by analysts might be the clearest sign yet that the US economy is going to avoid a recession, according to Fundstrat's Tom Lee.
"Into a recession, revisions to estimates are actually down but then they absolutely tank in the middle of a recession... but let's look at this cycle: last time we had positive revisions was third quarter of 2021 and estimates have been tanking through 2022, but then they kind of leveled out and they've since turned up. To me that's slipping into an expansion, it's not a recession. I think that's good news," Lee said in a video update to clients.
"The upturn in S&P 500 profit estimates is a strong argument the US economy is slipping into an expansion. While some might argue this will lead to the Fed having to increase pace of hikes, this is not necessarily the case," Lee said in a Friday note to clients.
While a stronger economy could reaccelerate inflation and lead to further interest rate hikes from the Fed, potentially hurting the stock market, Lee referenced a recent paper from the Federal Reserve Bank of Chicago that suggests inflation has been tamed.
"According to the model's forecast, the policy tightening that's already been done is sufficient to bring inflation back near the Fed's target by the middle of 2024 while avoiding a recession," the Fed paper said.