In financial markets, the impact of bad news can vary. Often, it’s straightforwardly negative, and other times, paradoxically, it becomes good news. Currently, the markets are eagerly awaiting an economic slowdown that could reduce job and wage growth. This hope is driven by the belief that the Federal Reserve will then be able to initiate an easing cycle, rewarding investors for looking beyond a potential recession towards brighter economic prospects. This is the market’s version of anticipating future opportunities, much like “skating to where the puck will be. “Historically, during economic downturns, this anticipatory behavior pushes earnings multiples higher as current earnings hit their lowest point. This contrasts with robust economic conditions where earnings are at their peak and earnings multiples are closer to their lows. If markets accurately predict shifts in interest rates and earnings, this pattern makes sense. However, as we’ve witnessed this year, markets can sometimes prematurely discount changing earnings or future interest rate levels, necessitating corrections back to previous levels when conditions revert, as occurred this fall.

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