The S&P 500 will climb 12% next year as inflation keeps falling and China's reopening eases supply chain pressures, Oppenheimer says

• The S&P 500 could advance by 12% to 4,400 from current levels in 2023, Oppenheimer said Monday.
• Stocks could find support from inflation easing after the Fed's aggressive campaign in raising borrowing costs.

Stocks look ready to spring up by 12% in 2023, with support from cooling inflation and reopening prospects in China, but too much tightening of monetary policy by the Federal Reserve poses downside risk, Oppenheimer said Monday.

Adding its voice to the 2023 outlook for equities, the asset management firm set a target of 4,400 on the S&P 500. The target represented nearly 12% upside from Friday's closing price of 3,934.38.

Such a move would dig into the S&P 500 likely loss for 2022, a year swayed largely by the Federal Reserve's fight against hot inflation centered on a fast pace of large interest rate increases. The 4,4400 level would, however, fall short of the index's all-time intraday high of 4,818.62 logged in early January.

"Inflation stateside continuing to trend lower" is among the factors contributing to Oppenheimer's target.

"In our view the Federal Reserve's policy towards inflation implemented this year has begun to have a positive effect reducing the momentum that inflation has had since late 2021," wrote John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, in Monday's note.

"While we do not expect the Fed to pivot or pause a process of rate hikes anytime soon, we do expect that it will temper increases of its benchmark rate going forward should inflation come down further," he wrote.

A step-down from four consecutive rate hikes of 75 basis points each may take place with Wednesday's policy decision from the Federal Open Market Committee. Federal Reserve Chairman Jerome Powell has suggested that policy makers will slow the pace of increases to 50 basis points, which would put the fed funds rate at a range of 4.25% to 4%.

Chinese policies could also play a role in pushing up the S&P 500 next year, with expectations that China "will have some success" in reopening the world's second-largest economy by loosening its stringent zero-COVID policy. Cities across China have backed off some testing and quarantine requirements in the wake of mass domestic protests last month.

China's zero-tolerance approach toward coronavirus infections has hurt the world's second-largest economy, said Stoltzfus. It has also "delayed the process of addressing supply chain disruptions which have challenged the economies of China's trading partners around the world."

Negative geopolitical developments from China as well as from Russia could contribute to knocking down stocks in 2023, the firm said. Negative implications and the impact on the global supply chain would include further COVID lockdowns in China, an incursion into Taiwan by Beijing, and a worsening outlook stemming from Russia's war in Ukraine. Oil production cuts by OPEC and its allies are also a downside risk factor, said Oppenheimer.

The firm said its earnings projection of $230 for the S&P 500 calls for a price-to-earnings multiple of 19x with near-flat earnings growth next year.

"Consensus earnings projections for 2023 while still considered too optimistic in the view of the bearish community may in fact have been right-sized by analyst revisions," said Stoltzfus.

The S&P 500 was moving toward a 17% loss in 2022 but the index has come off a steeper decline of nearly 30% notched earlier this year.