Stock market bulls have a “narrow path” to victory next year as long as inflation comes down faster than expected, according to Ed Yardeni, founder of his namesake research firm.

“They almost can’t win,” Yardeni, who is a longtime stock strategist, said on Bloomberg TV and Radio Thursday. “If you get an economy that’s too strong and that belies the idea of a recession, well then the Fed’s going to have to raise interest rates a lot more.”

“The key is that narrow path where inflation comes down quite a bit more than is widely expected,” he said, adding that he sees prices cooling faster than current market expectations.

Yardeni pointed to plunging used-car prices and cooling rents, as well as a decline in energy prices, as reasons why inflation could be calming faster than previously forecast. He expects 3% to 4% headline inflation in early 2023, which could ease concerns about spiraling prices.

The market veteran says that typically an inverted yield curve is a good predictor of recessions because, in the past, it’s signaled that “something was going to break, there’s going to be a financial crisis.” But this time around, there were crises in certain sectors, including in crypto — but there wasn’t a wider contagion.

“We’re probably more likely to get a soft landing out of all this,” he said.

Many strategists called 2022 incorrectly as the Federal Reserve ended up hiking interest rates at a speedy clip while inflation remained elevated. The S&P 500 is down over 20% for the year while the Nasdaq 100 has lost roughly 35% in what is turning out to be both their worst performances since 2008.

Yardeni says that certain leading indicators are scaring everybody because they’re pointing to an early-2023 downturn. “If there’s going to be a recession, it’s going to be soon, and that’s what the markets fear,” he said.

On the other hand, the economy is resilient and the banking system is robust. Plus, consumers remain in good shape and wages are likely to rise faster than prices in 2023. “Purchasing power is going to be there for consumers,” he said. 

This article was provided by Bloomberg News.