From Morningstar:

Optimism about the economy has led to a stock market rally, with investors banking on a soft landing and potential Fed interest rate cuts. Q4 GDP data might show a US slowdown, hinting at a soft landing or potential recession. Treasury bond dynamics and contraction of certain economic indicators show differing possible scenarios.

One year ago, a looming recession was anticipated, but the economy surged in Q3 despite a banking crisis. Now, Secretary Janet Yellen has declared a soft landing, while Wall Street expects one soon. The economy is regaining strength, sending stocks near their two-year high.

The timing of potential Fed interest rate cuts hinges on an impending soft landing. Market watchers await the Fed’s March meeting for signs of a successful pivot to cuts after an aggressive series of hikes. A soft landing may lead to three rate cuts this year, while a hard landing or growth surge could change rates further.

Consumer spending could be slowing down, with imbalance between services and goods spending indicating potential for a net slowdown. Despite strong employment figures, certain economic indicators are hinting at a different economic trajectory, according to analysts.

Recent declines in key economic indicators might indicate a bumpier landing than expected. Contraction of vital indicators suggests a partial hard landing already occurred. This condition points to recession-like conditions without an actual recession, leading to a debate about the exact nature of the landing.

A soft landing is plausible, but inflation and monetary policy uncertainty make it not yet guaranteed. Improvements in housing inflation could drive annual inflation rates to the Fed’s target. However, the risk of overheating and uncertainty about the economy’s response to previous rate hikes makes the certainty of a soft landing unclear.



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