The US has a 60% chance of avoiding a recession, and stocks could notch new all-time highs this year, market veteran Ed Yardeni says

• The US has a 60% chance of avoiding a recession, according to Ed Yardeni.
• In a recent op-ed, Yardeni pegged the odds of a downturn at just 40%, due to cooling inflation figures.

The US has a 60% chance of avoiding a recession, and stocks could notch a new all-time high this year as the market rebounds, according to Ed Yardeni.

Despite fears of a weakening economy, Yardeni made the case for a soft landing in 2023, despite still-high inflation and the prospect of higher interest rates. Already, officials have raised rates 450-basis-points to lower high prices, though experts warn high rates could overtighten the economy into a downturn.

In an op-ed for MarketWatch on Monday, the veteran strategist outlined four possible scenarios for the economy, predicting just a 40% chance a recession strikes this year:

Scenario 1: A soft landing. The economy has a 40% chance of a soft landing, a scenario where economic growth slows but the US still manages to avoid a full-blown recession. In this case, Yardeni predicted the Fed's preferred inflation measure will cool to 3%-4% by the end of the year, which will prompt just two more rate hikes from central bankers to cool off the economy.

He estimated the Fed funds rate will reach 5%-5.25% before central bankers pause their monetary tightening efforts, which should be bullish for the market, as stocks plunged 20% last year amid the Fed's aggressive rate hikes. A soft landing could mean the index will rebound and notch another all-time high of 4800 this year, Yardeni said, implying an increase of 20%.

Scenario 2: A disinflationary "no landing." The economy has a 20% chance of a disinflationary "no landing," where it avoids a slowdown altogether. While the economy continues to grow, prices will fall to 2%-3% range, and the Fed will raise interest rates to 5.5%-5.75% by the end of the year, Yardeni predicted.

Stock gains will be less than in a soft-landing scenario, but investors should still end 2023 in the green, he added, with the S&P 500 reaching 4000-4500 by the end of the year.

Scenario 3: A hard landing. The economy has a 20% chance of entering a recession, thanks to the Fed's aggressive monetary policy to cool off the economy. Rates are currently at their highest level since 2007, and officials have signaled more hikes are necessary in order to cool high prices, which could push the US into a more severe downturn.

Scenario 4: An inflationary "no landing." The economy has a 20% chance of an inflationary "no landing," where high inflation results in an even more severe recession and poor performance for stocks, Yardeni said, though he didn't include a year-end S&P 500 target.

While there's a chance the US could spiral into a recession, Yardeni remained optimistic on the strength of the US economy, and reiterated that a soft landing was his base case for the year. That's because a recession isn't necessary to bring down inflation, he previously said, as prices are already coming down at a steady pace.

"For now, we remain in the soft-landing club and have applied for membership in the disinflationary no-landing one," Yardeni said, though he noted the recession outlook could change with February's economic data. Markets are expecting inflation data for the month to roll out on March 14, which will guide central bankers in their next policy decision.