The S&P 500 could rally 10% through year-end with positive earnings surprises among the catalysts, says Oppenheimer

• The S&P 500 which has dropped 25% this year may experience a rally as 2022 winds down, said Oppenheimer.
• The asset manager cut its year-end target by 17% to 4,000 but that's still up from current levels.

The window on 2022 is closing but there's still some time and some reasons for the S&P 500 to improve what's been a dismal performance this year, according to Oppenheimer Asset Management.

The index's nearly 25% slide prompted the firm to cut its 2022 S&P 500 forecast by 17%, to 4,000 from 4,800. Though lower, that's still a nearly 10% jump from Monday's opening level of 3,636.

"Our year-end target price reduction for the S&P 500 is simply a function of the few weeks left in the year to effect a massive rally short of a miracle based on the levels of uncertainty the market has to digest at this time," John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said in a note published Monday.

Stocks have been hammered in the face of rising borrowing costs led by the Federal Reserve's quick pace of large interest rate increases this year in its battle against scorching inflation.

"The bad news and the good news is that the Fed appears to be sticking to its plan of bringing inflation under control. We do not expect the Fed to pivot before its efforts to stem inflation have shown more than just a little effect," he said.

"In our view, what is likely an extreme oversold condition in the stock market could become a catalyst for a modest rally before the year's end."

A number of other potential catalysts include upside surprises for the third-quarter corporate earnings season, which got underway last week, and any reduction in inflation. Stocks were coming off last week's shock of September core inflation rising by 6.6% year over year, the highest since 1982 and outstripping expectations of 6.5%.

With the US mid-term elections set to be held on November 8, "positive outcomes (perceived or otherwise)" may also serve upside for the S&P 500. Europe making progress in tackling its fiscal and energy challenges would aid the US equity market as well as weakening in the US dollar.

The widely watched US Dollar Index has soared by 17% this year, benefitting from haven flows and rising interest rates that are drawing in foreign investors in search of yield. But dollar strength can hurt revenue and earnings for US-based multinational companies as it makes their products and services more expensive in overseas markets.

Oppenheimer left unchanged its S&P 500 earnings projection of $230 per share.

The Federal Reserve has kicked up its benchmark rate since March to a range of 3%-3.25% from the 0% starting point at the beginning of the year. Markets are pricing in the possibility of further rate hikes sized at 75 basis points in November and December.

"The end of 'free money' is at hand and it is causing deleveraging that has likely caused a high degree of consternation among some market participants," Stoltzfus said. But its view on equities remains bullish.

The "stocks of many solid companies look grossly oversold as a result of extreme negativity that is evidenced in polls of investment professionals and private investors and in the day-to-day volatility in the markets."

Also, US economic fundamentals "remain remarkably resilient" though challenged by inflation, increasingly restrictive monetary policy to address inflation, and supply chain problems, the money management firm said.