Investors Optimistic About Soft Landing Ahead of Key Fed Decision

Investors are becoming more optimistic that the global economy could experience a soft landing, where inflation slows down without significantly harming economic growth.

According to Bank of America's August Global Fund Manager Survey, 79% of participants believe a soft landing is the most probable outcome for the global economy in the next 12 months. This is the highest level of confidence seen since May 2023, reflecting growing hope among investors.

Economists See Signs of Stability as the Fed’s Decision Nears

For now, many economists believe the economy can stay on track for a soft landing. Recent data indicates the labor market is cooling, but layoffs remain low, and the rise in unemployment has slowed. Inflation is also steadily declining toward the Federal Reserve's 2% target. Additionally, a report on August retail sales shows consumer spending is still robust.

"We still see strong consumer demand," said Stephen Juneau, Senior US Economist at Bank of America Securities. "Investment hasn’t slowed down sharply, so where's the hard landing? We just don't see it in the data right now."

Juneau emphasized that while there are signs of the economy cooling, they point to a soft landing rather than a sharp downturn. This outlook has boosted global investor confidence, especially with the expectation of upcoming interest rate cuts from the Federal Reserve.

Bank of America's survey revealed a rise in investor sentiment, driven by the belief that a soft landing and rate cuts are on the horizon. This comes just before the Federal Reserve's expected decision to cut interest rates for the first time since 2020. Wall Street is debating the size of the cut, with markets forecasting a 67% chance of a 50 basis point reduction, versus a 33% chance of a smaller 25 basis point cut, according to the CME FedWatch Tool.

A Strategic Rate Cut Could Boost Stock Market Optimism

The ideal scenario for the stock market? A 50 basis point cut by the Fed that doesn’t spark fears about the central bank’s ability to achieve a soft landing, according to Mike Wilson, Morgan Stanley’s Chief Investment Officer, in a note to clients on Sunday night.

Wilson described such a cut as an "insurance move" in anticipation of stabilizing economic data. However, he cautioned that the bond market suggests the Fed’s current "higher for longer" interest rate stance could pose a risk to the soft landing. While this doesn’t mean the Fed is out of options, he noted they might need to act more swiftly to keep investor optimism alive.

Meanwhile, Goldman Sachs Chief US Equity Strategist David Kostin added that if the economy remains resilient and the market begins to expect fewer Fed rate cuts, stocks could rise even in the face of higher bond yields. He set a 12-month target of 6,000 for the S&P 500.

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