The two pictures, quite simply, don’t line up. Or, as Joe Mazzola, head trading and derivatives strategist at Charles Schwab, puts it: “Something’s gotta give.”

Our bet is Wall Street buckles. But first, let’s look at how we got here.

The Fed is gearing up to lower interest rates on Sept. 18—for its first cut since March 2020—to curb rising unemployment and stave off any further weakening in the labor market. And many more cuts will likely follow: The federal-funds rate will most likely be in a range of about 3% to 3.25% by December 2025, according to recent futures market pricing. That marks a relatively fast drop from the current level of 5.25% to 5.5%, where rates have stood since July 2023.

But at the same time, investors are downright rosy about earnings growth. Analysts are predicting that profits for the S&P 500

SPX

0.75%

will rise more than 15% in 2025, up from their 12.8% forecast at the start of this year and a hotter pace than 2024’s expected earnings growth of 10.7%.

It’s a “fool’s errand,” Mazzola says, to expect such robust earnings growth for next year, while also predicting the possibility of eight rate cuts in the same period.

After all, the Fed is easing because the unemployment rate has started to rise and is expected to keep doing so, while inflation is decelerating. And if consumers start to feel the pinch from a slowdown in the labor market, they likely will spend less, which would hurt corporate profits.

There is a “disconnect” between how strong earnings are expected to be and the recent trend of disinflation, Jack Janasiewicz, lead portfolio strategist with Natixis Investment Managers Solutions, says.

Ultimately, Wall Street analysts will have to bring down their earnings estimates for 2025 if data continue to paint a softer U.S. economy.

The question is when. Mazzola said analysts might start trimming their forecasts after companies report third-quarter earnings in October. You could argue, however, there is reason to start lowering expectations now.

Executives at Goldman Sachs

GS

0.61%

and JPMorgan Chase

JPM

-0.30%

have already hinted that financial conditions are softening, particularly when it comes to trading revenue and net-interest income. And consumer lending giant Ally Financial

ALLY

-0.06%

’s CFO warned at an investing conference this week that “credit challenges have intensified,” and that borrowers are still struggling due to “high inflation” and “more recently, a weakening employment picture.”

Several high-profile retailers, such as Walgreens

WBA

1.14%

and Target, have also recently announced price cuts to try to ease the sting of prolonged inflationary pressures. That could prompt companies to lower their earnings forecasts as well—and could quickly change Wall Street’s ebullient outlook.

That could be bad news for stocks, given that the market isn’t exactly cheap. The S&P 500 is trading at 20 times 2025 earnings estimates, slightly above its historical average. So even after this recent bout of stock market volatility, investors may have too rosy an outlook for earnings next year.

There’s another potential plot twist. Skyler Weinand, chief investment officer with Regan Capital, doesn’t think the Fed is going to cut rates nearly as many times next year as the market expects. The only reason for the Fed to ease at every meeting in 2025 would be due to bad news, he said in an email, namely “if unemployment runs well above 5% or if there is a calamity or black swan event.” Absent this type of economic or market shock, he thinks the Fed may only reduce rates five to six times in 2025.

Overall, there’s either something off about the outlook for earnings or interest rates—and that mismatch doesn’t seem to be priced into stocks just yet.

That could be a problem until investors and the Fed are at least both reading from the same book.

Write to Paul R. La Monica at paul.lamonica@barrons.com