NEW YORK, Aug 16 (Reuters) - Hopes for an economic soft

landing are once again powering U.S. stocks higher, as

encouraging data relieve recession worries following a brutal

sell-off earlier this month.

The S&P 500 has rebounded more than 6% since Aug. 5,

when a steep drop pushed the benchmark U.S. index to its biggest

three-day slide in over two years. A rapid return to calm was

also evident in the Cboe Volatility Index, or Wall

Street's "fear gauge," which has retreated from last week's

four-year highs at a record pace.

Driving the turnaround are this week's reports on retail

sales, inflation and producer prices, which helped allay worries

over an economic slowdown sparked by weaker-than-expected

employment data at the start of the month. The favorable data

has bolstered the case for investors looking to hop back aboard

many of the trades that have worked this year, from buying Big

Tech stocks to a more recent bet on small and mid-cap names that

accelerated in July.

"There was a real growth scare that had emerged," said Mona

Mahajan, senior investment strategist at Edward Jones. "Since

then, what we've seen is the economic data has actually come out

in a much more positive light."

Some of 2024's biggest winners have staged strong rebounds

since Aug. 5. Chipmaker Nvidia has bounced more than

20%, while the Philadelphia SE Semiconductor index has

gained more than 14%. Small-cap shares, which had been strong

performers in July, have also recovered from recent lows, with

the Russell 2000 up nearly 5%.

Meanwhile, traders are unwinding bets that the Federal

Reserve will need to deliver jumbo-sized rate cuts in September

to stave off a recession.

As of late Thursday, futures tied to the Fed funds rate

showed traders pricing a 25% chance that the central bank will

lower rates by 50 basis points in September, down from around

85% on Aug. 5, CME FedWatch data showed. The probability of a 25

basis point cut stood at 75%, in line with expectations that the

Fed will kick off an easing cycle in September.

"You can't necessarily rule out the hard landing scenario

outright, but there's a lot of reason to believe that at this

point that economic momentum is being sufficiently sustained,"

said Jim Baird, chief investment officer with Plante Moran

Financial Advisors.

The Fed's plans could become clearer next week when Chair

Jerome Powell speaks at the central bank's annual economic

policy symposium in Jackson Hole, Wyoming.

"We think a key highlight of Powell's speech will be the

acknowledgement that progress on inflation has been sufficient

to allow the start of rate cuts," economists at BNP Paribas said

in a note on Thursday.

For the year, the S&P 500 is up more than 16% and is within

about 2% from its July all-time closing high.

Mahajan, of Edward Jones, expects the soft-landing scenario,

combined with lower interest rates, to help pave the way for

more stocks to participate in the market's rally, instead of the

small number of megacaps that have led indexes higher for much

of this year.

Analysts at Capital Economics believe that a U.S. economic

soft landing will support the artificial intelligence fervor

that helped drive markets higher.

"Our end-2024 forecast for the S&P 500 remains at 6,000,

driven by a view that the AI narrative which dominated in the

first half of the year will reassert itself," they wrote. That

target would be some 8% from the S&P 500's closing level on

Thursday.

The recent economic data, while reassuring, is far from an

all-clear for markets heading into September, which has

historically been one of the year's more volatile periods.

Investors will be closely watching Nvidia's ( NVDA ) earnings at the end

of the month, and another employment report on Sept. 6.

"There's been a sigh of relief in the market, clearly," said

Quincy Krosby, chief global strategist at LPL Financial. "The

question now is, will the next payroll report underpin what the

market expects at this point in terms of the soft landing."