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After breathtaking surge, US stocks’ path may rest on economic soft landing

Are U.S. stocks poised to continue their dramatic run, or is a pause ahead? That’s the question investors are asking as the S&P 500 heads into the close of the year with fresh highs coming into view.

Signs of cooling inflation have fueled hopes that the Federal Reserve is done raising interest rates, helping extend a rally that has seen the S&P 500 gain over 9% since late October. The index is now up nearly 18% for the year and less than 2% away from its year-high, reached in July. Its record closing level, from January 2022, is some 6% away.

Whether it can reach those levels in coming weeks depends in-part on how convinced investors are that the U.S. economy is on track for a so-called soft landing, where the Fed brings down inflation without badly damaging growth. So far, the economy has proven resilient in the face of tighter monetary policy, though some measures of employment and consumer demand have softened.

Rising valuations and still-elevated Treasury yields pose another obstacle. Other factors, however, including historical seasonal trends, could support more gains.

“We have this balance right now between a lower inflation outlook and a better interest rate trajectory … juxtaposed against a slowing economy,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management.

Investor optimism on equities has grown over the last few weeks, as markets rebounded from a months-long drop that ran from August through much of October. Stock exposure by active investment managers has shot to its highest level since August, from a one-year low hit last month, the National Association of Active Investment Managers exposure index showed.


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