Wall Street believes its soft-landing dream is on the verge of coming true. That is prompting a fresh wave of demand for stocks.

Markets have rallied since last week’s consumer-inflation report came in softer than expected. Many analysts and portfolio managers said they expect the gains to pick up heading into year-end, reflecting a sense that markets have faced down their most significant challenge: the potential for rising bond yields to crimp economic activity, reduce demand for stocks and send the U.S. economy into recession.

Stocks appear once again on an upswing, extending a renaissance that began this month when Treasury Secretary Janet Yellen eased fears about a bond-market rout by tweaking U.S. debt issuance plans. The S&P 500 rose 2.2% over the past week, capping the index’s best three-week stretch since June 2020 and putting it up 18% for the year. A torrent of buying in Treasurys has sent benchmark yields down to 4.441%, easing persistent concerns about whether rising financing costs will hamper U.S. growth.

This week, investors will be parsing minutes from the central bank’s last meeting for clues on the Federal Reserve’s continuing effort to contain prices. A series of cooler-than-expected inflation readings have taken another 2023 rate increase off the table, in the market’s view.

Many investors now expect the economy to cool enough for the Fed to begin reducing interest rates next year, without prompting a dramatic slowdown in consumer spending or a sharp contraction in the workforce. That should create optimal conditions for buying stocks, investors said.

“We’re in a mini Goldilocks scenario,” said Alessio de Longis, senior portfolio manager at Invesco, who said he is preparing for larger stock gains ahead. “The soft landing is playing out.”

The signs so far have been encouraging. Consumer-price inflation cooled more than expected in October, continuing a steady fall. A measure of producer prices fell 0.5% in October, the biggest drop since April 2020—before inflation started crimping Americans’ wallets.

S&P 500 companies are on track to increase profits for the first time in a year.

Jawad Mian, founder of Stray Reflections, a macroeconomic advisory firm, said he expects the Fed to start cutting rates next year and for stocks to continue their ascent, drawing in some of the investors who had kept an outsize chunk of their portfolios in cash.

“There’s this conundrum,” said Mian. “Do we chase or not?”

Some question whether the soft-landing talk is premature. In the past 11 Fed rate-hiking cycles, recessions have typically started around two years after the Fed begins raising interest rates, according to Deutsche Bank. This hiking cycle started last March.

Earnings season has been decidedly mixed in recent days. Walmart’s stock recorded its worst day in 18 months after Chief Executive Doug McMillon said the company would have to manage deflation in coming months and trim expenses to account for falling prices. Shares of Cisco dropped after the networking-equipment company slashed revenue forecasts.

The October jobs report showed that the red-hot labor market is slowing. The number of Americans filing for unemployment benefits surged.

Many investors are struggling to divine the meaning of a decline in oil prices that has dragged Brent crude prices down 17% from a recent high in September. To some, it is a happy development that will put more money in consumer pockets as gas prices retreat. To others, it might presage weakening demand around the globe that could amplify any slowdown here.

“There’s too much reliance on a soft landing at this point,” said Victoria Fernandez, portfolio manager and chief market strategist at Crossmark Global Investments. “We need to be a little bit cautious.”

For now though, the morsels of good news on the economy have led the stock market’s doubters to shed caution. In one of the clearest signs yet that investors are embracing a brighter outlook on the economy, the Russell 2000 index tracking shares of small companies jumped 5.4% over the past week. It has outpaced the S&P 500 this month.

Shares of these small companies have been flashing a recession signal, lagging behind the S&P 500 by the widest margin since 1998, according to Dow Jones Market Data. These companies are especially sensitive to borrowing costs and tend to generate more of their revenue domestically.

Yung-Yu Ma, chief investment officer for BMO Wealth Management, said his firm holds a slightly outsize position in small-cap stocks.

“We think it makes sense for small-caps to rally here if we get a stable economy with declining interest rates in 2024,” Ma said.