The stock market's optimal scenario has gotten a revival this week.

 

Since then, investors have not only recovered these losses but have seen additional gains, especially after a significant rally on Thursday powered by new economic data that revived Wall Street's hopes for cooling inflation and a stable, growing economy.

 

"Current sentiment extremes reflect excessive recession fears," said Tim Hayes, the chief global investment strategist at Ned Davis Research, in a note. "For both the US and globally, pessimism has given way not only to the realization that recession fears have been overblown but also to expectations for a more accommodating Federal Reserve, which is likely to follow other central banks in cutting rates next month."

 

Wall Street strategists find reassurance in four recent data points suggesting the economy can achieve a soft landing.

 

According to the Bureau of Labor Statistics, consumer prices neared the Fed's 2% target last month, rising 2.9% year-over-year in July, lower than the 3% annual increase expected by economists and below June's 3% yearly increase.

 

"The bottom line is that the path of decelerating inflation has slowed significantly but remains within a comfortable range for the Fed to start a series of rate cuts," Charlie Ripley, a senior investment strategist at Allianz Investment Management, noted this week.

 

Investors have been anticipating rate cuts all year. If the Fed does start easing policy, it could trigger a rally in stocks similar to the one in 1995, according to Wells Fargo's head of global investment strategy.

 

"The CPI report gives the Fed the green light to cut interest rates at their next decision," Bill Adams, the chief economist of Comercia Bank, stated this week.

 

Comercia projects the Fed will issue a 25-basis-point cut at its next four policy meetings, totaling 150 basis points in cuts over the next 12 months.

 

Investors are hoping for an even more aggressive pace of rate cuts, with markets pricing in a 41% chance that the Fed could cut rates by 100 basis points by the end of this year, according to the CME FedWatch tool.

 

Jobless claims were lower than economists expected, with new applications for unemployment benefits falling to 227,000 last week from the prior week's numbers, according to the Labor Department.

 

Initial jobless claims spiked to a one-year high at the beginning of August, but strategists suggest this could be due to severe weather events, like Hurricane Beryl.

 

"The decent activity indicators in July suggest that the month's rise in unemployment was not due to a slowing economy. It more likely reflects the impact of Hurricane Beryl on the Texas job market and an influx of new labor force entrants due to immigration and recent college graduates," said Comercia's Adams.

 

"Today's retail sales data and jobless claims offer further evidence that US recession risk remains low even as the economy decelerates from unsustainably strong growth," Ronald Temple, the chief market strategist at Lazard, added in a note.

 

July saw the largest jump in retail sales in over a year, rising 1% compared to the 0.3% increase expected.

 

These results are aligned with a "soft-landing economic outlook," Bank of America analysts noted, adding that they foresee two 25-basis-point rate cuts from the Fed this year.

 

"Retailers experienced a mid-summer boost from consumer spending in July, providing another solid data point indicating that the economy remains on an expansionary path," added Jim Baird, the CIO of Plante Moran Financial Advisors.

 

"Consumers are becoming more discerning with their spending amid higher prices and borrowing costs, but the latest retail sales data shows continued willingness to spend," said Lydia Boussour, a senior economist at EY, adding that the firm does not foresee a "consumer retrenchment" on the horizon.

 

Small business confidence has risen to its highest level since February 2022, just before the Fed's first rate hike, according to the latest survey from the National Federation of Independent Business.

 

The number of small business owners planning to invest in inventory increased by four basis points in July, marking the first positive reading since October 2022.

 

The percentage of owners expecting higher real sales volumes also rose by four basis points to the highest level this year, the survey noted.

 

"The NFIB's SMB Optimism Index reaching its highest point in almost two and a half years, along with new data showing a slowdown in inflation, suggests the recent spike in recession fears was unwarranted," said John Caplan, the CEO of financial firm Payoneer, to Business Insider.

 

Despite renewed optimism for a soft-landing scenario, some forecasters caution that there's still a significant chance of recession on the horizon, depending on whether the job market and economic activity continue to slow. According to the latest estimates from New York Fed economists, there's a 56% chance the economy could enter a downturn by July of next year.