(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, March 25 (Reuters) - U.S. economic

growth is set to slow this year, perhaps significantly, but no

one seems to have told Wall Street. While equity prices and

valuations have tailed off recently, analysts are still

expecting record-high profits.

In some ways, this is how it should work. Shifts in the

economic, political, regulatory or financial environment that

affect corporate profitability should be reflected in the stock

market well before analysts adjust their longer-term outlooks.

And a re-rating of sorts has already played out. U.S. equity

valuations have come off their historic peaks, as the S&P 500

has flirted with a 10% reversal from its record high and the

Nasdaq has waded deeper into correction territory. Earnings

growth is expected to slow modestly this year.

But profits, which are already at record-high levels, are

still expected to keep rising fairly quickly despite the

increasingly dour economic growth forecasts. The S&P 500

weighted average earnings per share estimate for 2025 is a

record high $269.91, representing growth of around 10% from last

year, according to LSEG I/B/E/S. The calendar year 2026 estimate

assumes there will be an additional 14% rise.

This suggests the re-rating hasn't gone far enough.

The mismatch can be resolved in one of two ways: either

growth holds up better than expected, justifying the bullish

earnings outlook, or earnings per share forecasts are ratcheted

sharply lower to reflect the bleaker economic environment.

Investors on Tuesday got further evidence of the darkening

growth outlook as the U.S. Conference Board's consumer

confidence index fell to a four-year low and expectations sank

to a 12-year low. Yet there was no major selloff on Wall Street.

This follows a recent University of Michigan survey that

showed the lowest consumer confidence in a two and a half years

and the highest long-term inflation expectations in 33 years.

If the consumer, who accounts for 70% of U.S. GDP, is simply

not feeling it, shouldn't earnings forecasts come down?

OUTLIER

Earnings per share estimates are nominal, so they'll rise

over time, much like the market itself. Periods of flatlining

earnings are rare and outright earnings recessions are even

rarer, as they tend to occur in and around actual recessions.

The most obvious outlier was in 2022-23 when earnings

estimates shrank more than 5%. Wall Street was in a bear market,

but the economy avoided recession.

A near-term recession isn't currently the consensus view

among economists, but the risk is rising as uncertainty fueled

by U.S. President Donald Trump's tariff and immigration policies

saps consumer and business confidence, putting spending plans on

ice.

Fed officials last week lowered their economic projections,

and if their median outlook for this year and next is borne out,

it will mark the slowest back-to-back annual growth rates since

2011-12.

And deterioration in the 'soft' data is already starting to

seep into the 'hard' data. Retail sales in January plunged at

their fastest rate in more than two years and barely recovered

in February. Again, this doesn't tally with the idea that

earnings will continue to rise at double-digit levels.

The flip side, however, is the view that growth fears are

overdone and that the economy will successfully navigate this

current political turbulence. Based on this thinking, if you're

an investor with a multi-year horizon, then it makes sense to

sit tight, ignore the noise, and stay invested.

Analysts at Schroders point out that market performance and

12-month forward EPS estimates have been closely correlated over

the past 20 years. Politically-driven market volatility tends

not to persist over long periods, and the turbulence it creates

can often be a buying opportunity for long-term investors.

But if Trump's tariff uncertainty forces consumers to

retrench to any significant degree, a reassessment of corporate

profitability will likely follow.

With this mismatch, one thing is for sure - in the coming

months, something has got to give.

(The opinions expressed here are those of the author, a

columnist for Reuters.)