Société Générale: The Federal Reserve's interest rate cuts and corporate profit growth are difficult to achieve simultaneously
Société Générale analyst Andrew Lapthorne pointed out that the paradox facing investors is the expectation of Federal Reserve interest rate cuts and the difficulty of achieving growth in U.S. corporate profits simultaneously. Historical data shows that interest rate cuts are usually accompanied by a decline in corporate profits, while the market expects earnings per share to grow by 15% next year. Although the decline in inflation provides room for interest rate cuts, slowing sales growth may lead to a decrease in profit margins. Lapthorne concluded that in 2025, there may be a scenario of strong profit growth accompanied by slight interest rate cuts, or significant interest rate cuts with limited profit growth
According to Zhitong Finance APP, as we enter 2025, investors face a paradox: they both anticipate interest rate cuts from the Federal Reserve and expect U.S. corporate profits to grow. However, Andrew Lapthorne, an analyst at Société Générale, points out that these two expectations cannot coexist.
In a report on November 30, Lapthorne elaborated on this viewpoint. He noted that historical data shows that when U.S. interest rates are lowered according to market expectations, corporate profits tend to decline by 10%. However, the current market generally expects earnings per share to grow by 15% next year, which sharply contrasts with historical trends.
Since inflation fell to the Federal Reserve's target of 2% this year, the Fed has cut interest rates twice, in September and November, totaling a reduction of 0.75 percentage points. Investors predict that the Fed will further cut rates to a range of 3.75% to 4% as early as September 2025.
Lapthorne further analyzed that while the decline in inflation provides room for rate cuts, it is often accompanied by a slowdown in sales growth. Due to the lag in cost adjustments compared to price and sales adjustments, profit margins tend to decline as sales growth slows.
He also pointed out that due to the dominance of the "seven giants" stocks—Google (GOOGL.US), Amazon (AMZN.US), Apple (AAPL.US), Meta Platforms (META.US), Microsoft (MSFT.US), NVIDIA (NVDA.US), and Tesla (TSLA.US) in the stock market, the data may be somewhat distorted.
Therefore, Lapthorne concluded: "The situation in 2025 seems to be either strong profit growth accompanied by modest rate cuts, or significant rate cuts with limited profit growth; it is hard to imagine a scenario where both can be achieved." This viewpoint directly addresses the paradox faced by investors, revealing the potential conflict between market expectations and the realities of economic laws