The stock market thinks we have the worst behind us, see chart below, which shows that earnings growth is expected to bottom this quarter and then improve quite rapidly over the coming four quarters.
This forecast will only be correct if core inflation moves quickly down towards 2%. If core inflation remains around 5%, then the Fed will have to put additional downward pressure on demand in the economy and ultimately earnings.
If core inflation remains sticky around 5%, we will likely remain longer in a period with high capital costs and low earnings growth.
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