Investing.com -- The Federal Reserve delivered a 50 basis point rate cut in September, leading to markets increasingly leaning toward the possibility of a "no landing" scenario.
The potential for this outcome, characterized by rising inflation expectations and the outperformance of cyclical stocks, has been further supported by the strong jobs report and hotter-than-expected CPI data.
According to Bank of America (NYSE:BAC) strategists, the "no landing" narrative could gain more traction if retail sales this week exceed expectations, which aligns with the firm's view.
“No landing’ is bullish for stocks, in our view, as long as inflation doesn’t flare up,” BofA strategists said in a Monday note.
“In a contained inflation environment, the relationship between rates and stocks should be positive. The Fed cutting into an accelerating EPS environment suggests cyclicals should outperform defensives,” they added.
Before the strong data from September, BofA saw signs of downside risks to their outlook. Payroll growth had slowed to an average of 116,000 per month in the three months ending August, hiring rates were declining, and labor market sentiment was worsening.
However, after revisions to GDP and GDI were positive and September payrolls exceeded expectations, the focus has shifted away from downside risks and toward potential upside risks.
“We continue to view a soft landing as the most likely outcome for the economy,” strategists continued. “But risks seem more balanced today than they were a month ago. Recession risks are low, as are no landing risks."
Still, if economic data continues to surpass expectations, the market narrative may increasingly lean toward a "no landing" scenario, potentially contributing to the ongoing adjustment of expectations around the Fed's rate-cutting cycle.