Deutsche Bank chief strategist Dr. Ed Yardeni says that while corporate profits will stay in the tank through the third quarter, he doesn’t see the economy following suit.

Yardeni notes that the latest U.S. employment report was not half as bad as expected. “I am impressed by how well jobs are holding up in the face of the very severe profits recession. Could it be that the profits recession is so severe because company managers are hesitant to cut costs by firing employees that were so hard to find about a year ago? Could it be that company managers worked so hard to boost productivity in the 1990s that most employees are needed to run their business even if business is down?”

Yardeni says that he sees three possible outcomes ahead: profits will soon recover and so will employment; profits will remain weak and employment losses will rise significantly; and, more of the same, profits will remain weak with only minor job losses.

“Take your pick: door #1, #2, or #3. I still expect that the profits recession will last through the end of the year and that the profits recovery next year will be lackluster. I also think we’ll continue to skirt an economic recession.”

Nevertheless, Yardeni does see economic weakness continuing through the end of the year. He says, stock prices should continue to move in a volatile, flat trend through the end of the year. “Then stock prices should rise at the same rate as earnings, which I project should increase at a more subdued pace of 7% per year, on average, over the rest of the decade.”

The wild card is all the liquidity in the economy says Yardeni. “Money has been pouring into money market mutual funds and bank deposits. Where will it all go? It might stay liquid for a while. Or it might flow back into stocks, or houses, or economic activity. Many investors are clearly itching to load up on tech stocks. They jump in every time any tech analyst says that business is so bad it can’t get much worse. Then the tech stocks take a dive when earnings are either pre-announced or actually reported.”