Investor confidence in the global economy achieving a “soft landing” is rising, as inflation appears to be falling toward the Federal Reserve’s target without triggering a recession. According to Bank of America’s July Global Fund Manager Survey, released on Wednesday, 68% of respondents believe a soft landing is the most likely outcome for the global economy over the next 12 months. This marks the highest confidence level since January 2024 and ties for the second-highest reading in the past year.
Shift in Investor Sentiment
The focus on a soft landing aligns with how fund managers are currently evaluating market risks. For the first time in six months, inflation was not listed as the number one risk by respondents; geopolitical conflict took the top spot instead. The survey, which included 585 respondents between July 5 and July 11, coincided with a positive Consumer Price Index reading for June. Although many respondents likely submitted their answers before this data was released, the optimism is notable and reflects growing confidence in the US economy.
Market Implications
This increasing confidence in a soft landing has influenced market dynamics significantly. On Tuesday, markets began pricing in a 100% chance that the Federal Reserve will cut interest rates by the end of its September meeting. This expectation has contributed to a broad stock market rally, with investors shifting from high-flying technology stocks to more interest-rate-sensitive sectors.
Over the past five trading sessions, the equal-weight S&P 500, which gives equal importance to all stocks in the index, has outperformed the traditional market cap-weighted S&P 500. Real Estate and Industrials, both sectors sensitive to interest rates, have seen the most significant gains, rising about 5%. In contrast, Technology and Communication Services are the only sectors with negative returns during this period.
Small-Cap Surge
Since the inflation report on July 11, the Russell 2000 has surged more than 11% in five trading days, including a 3% jump on Tuesday alone. In the same period, the S&P 500 has increased by just 1.5%. This performance indicates a nearly 10 percentage point outperformance by the small-cap index over the benchmark index, the highest five-day outperformance on record, according to Bespoke Investment Group.
Nicholas Colas, co-founder of DataTrek, noted in a morning briefing, “The fact that the Russell 2000’s recent rally is both statistically and historically unusual tells us investor sentiment has shifted dramatically, and the move very likely has further to run.” This statement underscores the growing investor confidence in a soft landing scenario and the potential for continued market gains.
Conclusion
The increasing confidence in a soft landing reflects a broader optimism about the global economy’s ability to navigate current challenges without falling into a recession. With 68% of fund managers predicting this outcome, the sentiment is that inflation will ease toward the Federal Reserve’s target, allowing for interest rate cuts without significant economic deterioration. This shift in investor confidence is already influencing market behaviors, as seen in the recent performance of various market sectors and indices. As the situation evolves, both investors and markets will be closely watching for further indicators that support this optimistic outlook.
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