The odds of the US avoiding a deep recession are rising, but one ingredient is still needed for stocks to rally

• The US economy is looking up as consumers continue to spend their excess savings, according to market veteran Ed Yardeni.
• In a recent note, he increased the chances of a soft economic landing to 70% from 60%.
• But in order for the stock market to continue to rally, there's one missing ingredient that's needed.

The resilience of the US economy and consumer continues to shine, and that should help increase the likelihood that a deep recession is avoided, according to market veteran Ed Yardeni.

In a recent note, he increased the odds of a soft landing to 70% from 60%, which reflects ongoing strength in consumer spending and the continued drawdown of excess savings built up during the COVID-19 pandemic.

"We've previously observed that the pandemic was a shock to all of our lives, and that the aftershocks continue. But there have been several shock absorbers that absorbed the shocks unleashed by the pandemic, and they continue to do so," Yardeni said.

A recent analysis from the Federal Reserve Bank of San Francisco suggests consumers still have $500 billion in excess savings built up during the pandemic, and that reserve could help support consumer spending into the fourth quarter of this year.

All that spending ultimately will have a knock-on effect to the broader economy, Yardeni said, who listed a slew of other factors that are currently supportive of a soft landing.

"Consumers have excess saving and are spending more on services, which is boosting employment in services. Retiring baby boomers are spending on restaurants, travel, and healthcare. Onshoring and infrastructure spending are boosting the economy," Yardeni said.

But he sees one missing ingredient for the resilient economy to translate into a rallying stock market: more bearish investors.

According to Yardeni, the recent rally in stocks so far this year has led to a decline in bearish, skeptical investors and an increase in bullish investor. For a contrarian, that's not a great setup for rallying stock prices.

Yardeni highlighted the Investors Intelligence Bull-Bear Ratio, which spent most of the second half of 2022 below 1.0, "which we observed was a very strong buy signal from a contrarian perspective."

But since the stock market rally that began on October 12, the Bull-Bear Ratio has surged closer to 2.0 in recent weeks. Meanwhile, the bearish percentage for the week of May 23 was just 23.9%, representing its lowest level since the end of 2021, just before the bear market started.

"We may need more bears to move the stock market higher," Yardeni said.