The bull market was born nearly two years ago and has been sustained ever since by a single premise: that inflation falls faster than the U.S. economy slows. Falling price pressures are destined to meet solid GDP growth at a crossroads known as a “soft landing,” at which the Fed can triumphantly but cautiously undo the policy tightening it began two and a half years ago. While these broad forces remain in place—consumer inflation and real GDP are both operating within a comfortable range of 2% to 3%—equities are wobbling as investors worry the economy has shifted from slowdown to stagnation. Bond yields have also fallen sharply. It was a very clear message that Wall Street was back in growth panic mode, as belief in a soft landing for asset prices leaked, with the S&P 500 falling 4.2% last week, back to levels first reached in June. Utilities are beating semiconductors this year, while the 10-year Treasury yield fell to a 14-month low near 3.7%. .SPX mountain 2022-09-05 S&P 500, Biennial August jobs report released Friday was disappointing on the surface and also frustrated traders as it failed to clarify the current state of the labor market. Its 142,000 net job gains were below expectations of 160,000, and downward revisions to previous months' payrolls were also pessimistic. However, some argue that six-digit job growth and a modest decline in the unemployment rate are inconsistent with a worrying economic downturn. Bank of America economists declared the report “soft but not weak.” As with some storylines on Wall Street, the debate over the exact characteristics of the economic landing may seem overwrought as the Fed continues to pump the brakes for 14 months. However, whether the economy will continue to grow or enter a contraction mode is close to the entire trend of the stock market in the medium term. Stock market after rate cut No matter what the file keepers insist, the market's performance after the Federal Reserve's first rate cut was not uniform. If a rate cut is not quickly followed by a recession, stocks will move higher. If the rate cut turns out to be too little, too late, the market will take a serious hit. Once the Fed signals that easing is imminent (as Chairman Powell clearly did last month), then markets will be hungry for good economic news to ensure that a rate cut is more of an insurance policy than a rescue. That reassurance was mostly put on hold last week amid weakness in manufacturing, employment and the Fed's Beige Book index, although the massive services sector continues to hold up well. Still, as I keep pointing out, the road to a soft landing is paved by persistent doubts about whether a soft landing is certain. It's more of a contingent, vague condition than a destination that everyone agrees on. The bond market is desperately pleading with the Fed to continue its policy reversal, with two-year Treasury yields now at a record below the federal funds rate. US2Y 1Y Alpine 2-Year Treasury Bond Yield, 1-Year These information need to be respected, but they are not the final word on the future direction of the economy. Layoffs remain at low levels, and looking back one year, wages continue to grow faster than inflation, although unit labor costs have fallen and productivity indicators are rising rapidly. Warren Pies, founder of 3Fourteen Research, found that residential construction employment is a reliable predictor of recession. For now, it continues to hold steady, with a soft landing being his base case scenario, but the situation is getting tougher and housing activity needs to pick up sooner rather than later in response to lower interest rates. Tim Hayes, global strategist at Ned Davis Research, noted last week that the magnitude of earnings revisions in global equities has been impressive — with more companies seeing upward earnings forecast upgrades than downward revisions. company. This is also historically inconsistent with recent recessions. Credit markets are also strong, with a large number of corporate debt issuances last week easily absorbed by investors. Momentum Stocks Fail While macro headwinds are critical, it's not just the economic backdrop that stocks face. A sharp downside reversal in momentum strategies and a disruptive shift in leadership away from large-cap growth stocks have also been rattling the market since mid-summer. As I've pointed out many times, broader-inclusive stock markets are not necessarily more stable right now, and this quarter's moves show just how volatile markets can become when the most important index leaders come under pressure. The Philadelphia Semiconductor Index is down about 24% from its two-month all-time high, while the S&P 500 and other weights have gained several percentage points over the same period. .SOX YTD mountain PHLX Semiconductor Index, YTD The Nasdaq 100 fell more in the July-August setback, recouped smaller losses in the market rally, and continues to underperform in the latest pullback , a major proxy for the boom that has been cooled by a broader rethinking of the topic of investments in artificial intelligence. It's a “be careful what you wish for” moment for those who have spent months longing for less concentrated market leadership, but so far the friction hasn't done much damage. Despite the jitters in the air and strange market moves last week, the S&P 500 is still less than 5% below its all-time peak in mid-July and still 4% above its correction low in early August. From a very short-term perspective, the index is broadly oversold, near the August 5 tactical low. It sits in an interesting spot near 5,400, the June breakout level ahead of second-quarter earnings and very favorable inflation data. .SPX YTD mountain S&P 500, YTD In the broader framework, markets hit all-time highs on July 16, taking advantage of the fleeting certainty that a soft landing was a foregone conclusion and that the Fed would remain in the midst of a crowded and Expensive Magnificent 7 stock remains at a premium, at the right time and for the right reasons, and market breadth could improve. We have now spent several months questioning these beliefs. The imminence of a Fed rate cut and the suspense over macro data flows are draining bulls' confidence, but that doesn't mean their case hasn't been lost yet.