Wall Street Week Ahead: S&P 500 Rebounds as 'Soft Landing' Hopes Lift US Stocks

 Hopes for an economic soft landing are once again driving U.S. equities higher, as promising data alleviates recession fears after a severe sell-off earlier this month.

The S&P 500 (.SPX), opens new tab, has recovered more than 6% since August 5, when a precipitous decline sent the benchmark U.S. index on its worst three-day loss in more than two years. The Cboe Volatility Index (.VIX), widely known as Wall Street's "fear gauge," has dropped at an unprecedented rate from last week's four-year highs.

The turnaround is being driven by this week's retail sales, inflation, and producer pricing figures, which have allayed concerns about an economic slowdown caused by weaker-than-expected job statistics at the start of the month. The positive data has boosted the case for investors eager to re-enter many of the successful trades this year, from buying Big Tech companies to a more recent bet on small and mid-cap names that surged in July.

"There was a real growth scare that had emerged," said Mona Mahajan, senior investment strategist at Edward Jones. "Since then, what we've seen is the economic data has actually come out in a much more positive light."
Some of 2024's greatest winners have made remarkable comebacks after August 5. Nvidia (NVDA.O) has risen more than 20%, while the Philadelphia SE Semiconductor index (.SOX) has increased by more than 14%. Small-cap stocks, which had performed well in July, have also rebounded from recent lows, with the Russell 2000 (.RUT) rising over 5%.

Meanwhile, traders are reversing their bets that the Federal Reserve would need to deliver massive rate cuts in September to avoid a recession.
As of late Thursday, futures related to the Fed funds rate showed traders pricing in a 25% likelihood of the central bank cutting rates by 50 basis points in September, down from approximately 85% on August 5, according to CME FedWatch data. The chance of a 25 basis point decrease stayed at 75%, consistent with predictions that the Fed will begin an easing cycle in September.

"You can't completely rule out a hard landing, but there's a lot of reason to believe that at this point, economic momentum is being sustained," said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
The Fed's plans may become clearer next week, when Chairman Jerome Powell talks at the central bank's annual economic policy conference in Jackson Hole, Wyoming.
"We think a key highlight of Powell's speech will be the acknowledgement that progress on inflation has been sufficient to allow the start of rate cuts," analysts at BNP Paribas said in a note on Thursday.
The S&P 500 is risen more than 16% this year and is only around 2% off its all-time closing high in July.

Mahajan of Edward Jones believes that the soft-landing scenario, paired with lower interest rates, would allow more equities to participate in the market's rebound, rather than the tiny number of megacaps that have powered indices upward for much of this year.
Capital Economics analysts predict that a gentle landing in the United States would bolster the artificial intelligence frenzy that has helped fuel market gains.

"Our end-2024 forecast for the S&P 500 remains at 6,000, driven by a view that the AI narrative which dominated in the first half of the year will reassert itself," the analysts said. That aim is almost 8% higher than the S&P 500's closing level on Thursday.

While recent economic data is promising, it is far from a guarantee for markets moving into September, which has traditionally been one of the most turbulent months. Investors will keenly follow Nvidia's results at the end of the month, as well as another jobs data on September 6.
"There's been a sigh of relief in the market," said Quincy Krosby, LPL Financial's chief global strategist. "The question now is, will the next payroll report underpin what the market expects at this point in terms of the soft landing."