Fed's Soft Landing Talk Meets Hard Data

Authored by Lance Roberts via RealInvestmentAdvice.com,

The Fed’s soft landing narrative is a key theme in financial media, particularly on Wall Street, which expects a resurgence in economic activity in 2026 to justify increasing forward earnings expectations.

As shown, Wall Street currently expects the bottom 493 stocks to contribute more to earnings in 2026 than they have in the past 3 years. This is notable in that, over the past three years, the average growth rate for the bottom 493 stocks was less than 3%. Yet over the next 2 years, that earnings growth is expected to average above 11%.

Furthermore, the outlook is even more exuberant for the most economically sensitive stocks. Small and mid-cap companies struggled to produce earnings growth during the previous three years of robust economic growth, driven by monetary and fiscal stimulus. However, next year, even if the Fed’s soft landing narrative is valid, they are expected to see a surge in earnings growth rates of nearly 60%.

Notably, all this is occurring at a time when the entire economy’s profit margins have peaked and may potentially be turning lower.

It should come as no surprise that there is a high correlation between economic growth and earnings, given that in a demand-driven economy, consumption is what generates revenues, and revenues ultimately develop earnings.

“A better way to visualize this data is to look at the correlation between the annual change in earnings growth and inflation-adjusted GDP. There are periods when earnings deviate from underlying economic activity. However, those periods are due to pre- or post-recession earnings fluctuations. Currently, economic and earnings growth are very close to the long-term correlation.”

The problem currently facing the Fed’s soft landing narrative is that it hopes the economy can slow without a recession, allowing inflation to return to its target. For now, investors have held the markets higher, hoping the Fed’s soft landing narrative comes to fruition, which would lead to a surge in economic activity. However, the latest employment, retail sales, and inflation trends suggest a potentially worse outcome, characterized by weakening demand and shaky consumer strength.

Those factors weaken the case for the Fed’s hopes of a soft landing and suggest an increase in market fragility.

Falling Inflation Tells a Demand Story

Let’s start with inflation. If economic growth were on the cusp of resurgence, expectations for inflation would be rising. However, as shown, those expectations never rose with “printed inflation,” because it was the “transitory effect” of massive monetary stimulus. The bond market’s view was that inflation would revert to its normalized levels as that monetary excess left the system, which has been the case. This is particularly notable, as inflation expectations have always been more accurate than the “inflation” bears we discussed yesterday.

In the Fed’s narrative of a soft landing, the trend in inflation expectations is crucial. Here is an essential point:

“The Federal Reserve WANTS inflation.”

Here is another critical point: So do you.

Without inflation, there can not be economic growth, increasing wages, and an improving standard of living. In other words, prices must always rise over time, which is why the Fed targets a 2% inflation rate, thereby supporting 2% economic growth. What we don’t want is “disinflation” or “deflation,” which would occur in conjunction with a recession, leading to job losses, falling wages, and reduced prosperity overall. As shown in the chart below, there is a high correlation between inflation, economic growth, and interest rates over time.

When inflation eases because demand weakens, the economy slows, producers lower prices to clear unsold goods, and employers become more restrictive in hiring and wage increases. Services that rely on discretionary spending lose pricing power, and banks become more stringent in their lending practices. These are not signs of a healthy expansion, but rather reflect a decline in spending power among households.

The Fed’s soft landing narrative is predicated on the hope that it can achieve its 2% inflation target without causing a more widespread slowdown. Historically, the Fed has failed in such attempts, as shown by the relationship between Fed rate-cutting cycles and economic and financial consequences.

As an investor, you need to distinguish between inflation caused by temporary supply/demand shocks, as we saw following the Pandemic, and inflation caused by organic economic activity. Supply/demand imbalances, such as higher input costs or a lack of supply caused by a geopolitical shock, can create a spike in inflation, which resolves itself when the shock is over. However, inflation caused by organic demand provides insight into the strength or weakness of the economy. Currently, we are focused on potential demand erosion as consumers cut back, employment weakens, and wages decline.

The retail sector provides early signals of demand weakness. Housing-related spending, auto sales, and discretionary purchases show stress, and many consumers face higher borrowing costs and lower savings. As shown, PCE, which accounts for nearly 70% of the GDP calculation, slowing inflation rates, and weak retail sales growth, all suggest that demand destruction is present in the economy. Such a development may further weigh on the Fed’s narrative of a soft landing.

As noted, the Fed’s soft landing narrative requires demand to slow moderately while avoiding recession. However, falling inflation driven by weakening demand and sluggish employment growth suggests a more profound weakness.

Retail Sales Growth Is Not What It Appears

Headline retail sales reports often show month-over-month increases, which reporters interpret as evidence of resilient consumer strength. However, a look at the data tells a different story. For example, since 2022, real retail sales growth has effectively not grown. In fact, previous periods of flat retail sales growth were pre-recessionary warnings.

Secondly, the annual rate of change in real retail sales is at levels that have typically preceded weaker economic environments and recessions.

Notably, retail sales figures are subject to seasonal adjustments, which correct for typical spending patterns. During the holiday and back-to-school seasons, spending increases and the “adjustments” attempt to remove these effects. However, if the adjustment process overestimates normal seasonal strength, the adjusted result will appear firmer than it actually is. Secondly, another distortion comes from changes in price levels. If prices fall because demand weakens, nominal sales may rise while real volumes fall. Consumers buy less but pay lower prices. Nominal retail sales can mislead when viewed without context.

This is what we are currently seeing in the economy. As consumers pull back, businesses face the prospect of weaker revenue. That leads to slower hiring, lower investment, and falling confidence.

This matters for the Fed’s view of a soft landing. If consumer demand remains weak, the economy may slow more than expected, which increases the risk of recession. A “soft landing” requires growth to slow without tipping over, but current economic data points suggest a risk to that growth story.

The Market Risk If The Fed Is Wrong

If the Fed’s soft landing narrative proves incorrect, the downside risk to investors increases significantly. The soft landing narrative has been factored into market prices, earnings expectations, and economic projections. Any deviation exposes valuations and portfolios to sharp repricing. With valuations already very elevated, the risk of a repricing event is not insignificant.

Wall Street’s forward expectations hinge on a growth rebound in 2026. Those projections assume that demand will return and margins will remain stable. However, there is no guarantee that either of those assumptions are accurate. If margins have already peaked, inflation declines as demand erodes, and employment falls, negative earnings revisions could be substantial. The year-over-year change in real retail sales, as shown in the chart, has hovered near recessionary warning levels. With consumers already strained by high debt service costs, weak wage growth, and declining savings, discretionary spending is under pressure, which directly affects earnings across cyclical sectors.

If demand weakens further, companies will face lower revenue and tighter margins. The margin compression will initially impact earnings, particularly for smaller firms with limited pricing power. A repricing of earnings expectations will follow, dragging valuations with it.

The Fed’s historical track record of avoiding recession during tightening and easing cycles is poor. Most rate-cutting cycles have been in response to financial or economic stress, not smooth slowdowns. If the Fed cuts rates next year, it likely won’t be in response to a soft landing. That shift in narrative would catch most investors leaning the wrong way.

Positioning for a soft landing assumes the Fed can control inflation without breaking demand. The data say otherwise. The risk, as always, is that the market wakes up to this reality too late. Therefore, investors should consider preparing for such a possibility in advance.

If the Fed’s soft landing narrative fails, investors will face a different environment than the one markets currently price. The assumptions behind strong equity valuations, tight credit spreads, and risk-on positioning will crack. If it does, that means you will need to act based on risk, not rhetoric. Here are some actions to consider.

1. Reduce Exposure to Overvalued Growth Assets: Tech and growth stocks led the rally on rate cut hopes and soft landing optimism. If earnings disappoint and rates stay higher, these valuations come under pressure.

• Trim overweight positions in mega-cap tech.
• Avoid speculative names with no earnings.
• Focus on companies with strong cash flow and pricing power.

2. Increase Cash and Short-Term Treasuries: If growth slows and volatility returns, capital preservation matters. Cash gives you optionality. Short-term Treasuries offer yield without duration risk.

• Rebalance toward 3-month to 1-year Treasury bills.
• Hold cash equivalents yielding over 4.5 percent.
• Avoid reaching for yield in low-quality credit.

3. Tilt Toward Defensive Sectors: Slower growth hits cyclicals and high beta sectors first. Defensive sectors hold up better in downturns.

• Favor healthcare, consumer staples, and utilities.
• Limit exposure to discretionary, financial, and industrial sectors.
• Screen for dividend sustainability and balance sheet strength.

4. Prepare for Credit Stress: If recession risk rises, corporate credit spreads will widen. Junk bonds will suffer. Bank lending tightens further.

• Exit high-yield bonds and floating-rate loans.
• Review credit exposure in bond funds.
• Consider higher-quality fixed income with lower default risk.

5. Be Patient and Opportunistic: If markets break, forced selling creates dislocations. You want dry powder ready.

• Hold 10–20 percent in cash or equivalents.
• Build watchlists of high-quality names at lower valuations.
• Add in stages as prices adjust, not all at once.

You don’t need to predict a recession. Instead, prepare for the potential risk if the Fed’s hopes for a soft landing fade. You can always increase risk more easily than recovering from losses. Remaining disciplined, protecting capital, and looking for opportunities is always the best course of action.

Trade accordingly.

Tyler Durden Sun, 12/21/2025 - 09:20

Britain's Ruling Class Loves To Cosplay As A Titan

Authored by Gerry Nolan via The Ron Paul Institute

From the podium, it’s Churchillian thunder: prepare for war, deter Russia, stand tall, lead the free world. Back in the engine room, it’s Whitehall with a calculator, sweating through its suit because the numbers simply don’t work. The Financial Times reports Starmer has delayed the Defence Investment Plan over "affordability," kicking it into 2026, because the military’s wish list collided with the Treasury’s reality. Translation: the rhetoric is premium, the balance sheet is bargain-bin.

And then, because the universe has a sense of irony sharp enough to cut steel, enter Ajax; the £6-plus billion armored vehicle program that has become the British state’s spirit animal. Trials paused again. Fresh safety concerns. Soldiers injured. Crews sickened by vibration and noise. Endless reviews. Endless "lessons learned." Endless press lines insisting this is all somehow progress.

If you want to understand modern Britain, don’t read strategy documents. Watch a procurement program that cannot stop hurting the people it is meant to protect.

Ajax was meant to be the backbone of Britain’s future armored forces, a next-generation reconnaissance and strike platform designed to replace ageing vehicles and restore credibility to the British Army’s maneuver capability. Instead, it has become a case study in institutional failure: spiraling costs, years of delay, fundamental design flaws, and a safety record so poor it forced repeated trial suspensions. Soldiers were not merely inconvenienced; they were physically harmed in testing, suffering hearing damage, sickness, and long-term health concerns.

This is not a marginal technical glitch. It is the predictable outcome of a system where industrial capacity has been hollowed out, accountability diffused, and procurement reduced to a paper exercise optimized for contracts, not combat. Ajax does not fail because Britain lacks engineers or soldiers. It fails because Britain no longer possesses a state machinery capable of translating ambition into functioning hardware at scale.

This is the farce at the heart of the Atlantic security sermon.

Britain speaks about Russia the way a fading aristocrat sneers at a rising industrial superpower… condescending, dismissive, utterly uncurious. For years we’ve heard the same insult recycled like a nervous tic: Russia is a "gas station," a crude petro-state propped up by fumes and nostalgia. Yet here we are.

Russia the “gas station,” under the most comprehensive sanctions regime in modern history, has been forced—by Western institutions themselves—into an inconvenient admission: Russia now ranks as the fourth-largest economy in the world by purchasing-power parity.

So let’s pause and ask the question Britain’s elites refuse to face. If Russia is a glorified gas station, what exactly does that make Britain? A country that cannot publish a defence investment plan on time. A state that cannot field a functioning armoured vehicle without injuring its own troops. An economy that cannot sustain rearmament in spite of private finance gimmicks and accounting contortions. A political class that cannot reconcile its war talk with its industrial capacity.

If Russia is a gas station, Britain increasingly resembles a heritage museum complete with a gift shop, living off past glories while subcontracting its future.

Now let’s move to where the illusion truly collapses, production.

Wars are not won by hysterical speeches, theatrical bravado, summits, or moral pronouncements. They are won by output — steel, shells, access to critical minerals, drones, logistics, and the brutal arithmetic of throughput. On this front, the West has been dragged, kicking and screaming, into recognition of a reality it tried to meme out of existence.

Russia's military-industrial base bureaucratically compressed, hardened, and scaled under pressure —now outpaces NATO’s collective ammunition production by a multiple. Western officials themselves have been forced to admit the gap, even as they scramble to promise future catch-up schedules that read more like aspiration than viable plan.

In sum, while Russia produces, Britain reviews glorified mission statements. And while Russia iterates, Britain delays indefinitely out of impotence. Russia fields game changing adaptations learned from battlefield within months. While Britain commissions another inquiry.

And this is where the mockery turns into indictment.

Because Britain is not merely weak. It is performatively Russophobic, a leading amplifier of a psychological contagion that has swept Western Europe. A political culture that replaced diplomacy with insult, respect with caricature, and strategic realism with adolescent moral posturing.

For decades, Russians asked for nothing exotic. Security guarantees. Recognition of reasonable red lines. A place in a shared European security architecture. Basic respect and dignity after the Cold War. They were met instead with NATO expansion, broken promises, regime-change evangelism, and the casual humiliation of a great civilization reduced to punchlines for Western domestic politics.

And now, after years of stoking this hysteria, inflaming this anger, and dismissing Russian concerns as paranoia, Britain offers the world a confession written in delays, budget shortfalls, and broken machinery.

For all the talk of deterrence, what they’re left with is cold reality, exposure. A state that talks war while failing at procurement is not projecting strength. It is advertising vulnerability at scale. A leadership class that cannot fund its own defence while demanding continental confrontation is not leading, but gambling with other people’s lives.

For a country in this position to posture as a peer adversary to Russia is not serious strategy. It is suicide pact dressed up as virtue. At this point, honesty would demand something radical in London: humility and sober realism.

A state in Britain’s position should not be lecturing the world, moralizing from the sidelines, or inflating its own strategic importance. It should be urgently repairing what it helped to destroy, namely trust, diplomacy, and the basic architecture of European security. It should be suing for peace, not performing toughness it cannot afford.

Because history is unforgiving to former empires that mistake memory for power.

Russia did not arrive at this moment through fantasy. It arrived through necessity, through sanctions, pressure, exclusion, and the steady realisation that the West no longer spoke the language of compromise, only command. Britain, by contrast, arrived here through illusion: convinced it was still a titan while outsourcing its industry, hollowing out its capacity, and replacing strategy with theatre.

This is the real danger now, not Russian strength, but Western self-deception.

A political class that cannot build, cannot fund, and cannot field its own defence has no business escalating confrontation with a civilization that can. When rhetoric races far ahead of reality, history does not intervene gently. It intervenes brutally. Britain is not preparing for a conflict with Russia. It is preparing for a reckoning with the reality of its own weakness.

And reality, unlike Whitehall briefings, legacy slogans, or moral posturing, does not negotiate.

Tyler Durden Sun, 12/21/2025 - 08:10