Investors are increasingly convinced that the global economy is headed for a so-called soft landing — where inflation falls toward the Federal Reserve’s target without high interest rates sending the economy spiraling downwards.
In Bank of America’s July Global Fund Manager Survey, released Wednesday, 68% of respondents said a soft landing for the global economy over the next 12 months is most likely, the highest percentage of respondents backing such an outcome since January 2024 and tied for the second-highest mark in the past year.
The call for a soft landing is in line with how fund managers are currently assessing the market’s risk balance: For the first time in six months, inflation wasn’t the No. 1 risk cited by respondents (geopolitical conflict took the top spot).
The 585 respondents were surveyed between July 5 and July 11, meaning the final day of the survey coincided with the unexpectedly strong June Consumer Price Index (CPI) report, meaning many of the respondents may have answered the questions before the inflation numbers that recently excited markets.
But the change is still noteworthy and represents the latest sign that markets are becoming more optimistic about the U.S. economy as the Federal Reserve begins to cut interest rates without a significant deterioration in economic conditions.
On Tuesday, markets began pricing in a 100% chance that the Fed will cut interest rates by the end of its September meeting. That sentiment has fueled a broad stock market rally, with investors shifting money away from technology stocks, which soared last year, and into interest-rate-sensitive sectors.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
Federal Reserve Chairman Jerome Powell speaks during an interview with David Rubenstein at the Economic Club of the Marriott Marquis Hotel in Washington, DC, on July 15, 2024. (Nathan Howard/Getty Images) (Nathan Howard via Getty Images)
Over the past five trading sessions, the equal-weighted S&P 500 (^SPXEW), which ranks all stocks included in the index equally and is not overly affected by the size of stock price increases or decreases, has outperformed the traditional market-cap weighted S&P 500.
Real estate (XLRE) and industrials (XLI), both interest-rate sensitive sectors, were the market’s biggest winners, rising about 5% over the same period, while technology (XLK) and communication services (XLC) were the only sectors with negative returns.
Since the July 11 inflation report, the Russell 2000 (^RUT) has risen more than 11% over the past five trading days, including a gain of more than 3% on Tuesday alone, while the S&P 500 (^GSPC) has risen just 1.5% over the same period, meaning the small-cap index has outperformed the benchmark by nearly 10%, marking its best five-day outperformance on record, according to Bespoke Investment Group.
The story continues
“The fact that the recent rally in the Russell 2000 is both statistically and historically unusual indicates a dramatic shift in investor sentiment that is likely to continue,” DataTrek co-founder Nicholas Colas wrote in a note Tuesday morning.
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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