Entering 2023, most investors and much of Wall Street are in a sour mood. We are seeing many analysts issue forecasts for lower prices in 2023, and Wall Street analysts are cutting earnings estimates for companies.

It's not surprising given that 2022 has been a brutal year with stock prices down as much as 25% before recovering about half of these losses since early October. 2022 posed a severe and historically unique challenge given raging inflation and a slowing economy. The economy continues to slow but from a high rate that it has remained stronger than expected as evidenced by the recent jobs report.

This is the backdrop as the calendar turns to 2023. But, it might be profitable to indulge in some contrarian thinking to consider the bull case, and why it's actually quite strong.

The biggest determinant of stock prices will be earnings and interest rates. For instance, 2022 featured a modest increase in earnings but stock prices fell as rates spiked due to the Federal Reserve's hawkish policy.

And, the biggest variable impacting Fed policy is inflation. One factor in recent stock market strength is certainly the constructive developments in the inflation picture. Inflation remains well above the Fed's 2% target, but it is well off the peak of 9% in June and came in at 7.1% in November.

Here's where it gets tricky. The move lower in inflation is in one part due to the pandemic and supply chain issues being mostly over, but it's also responding to the economy slowing due to the Fed's extremely tight policy. This will certainly impact earnings.

But, there is an increasing possibility that the market has already discounted such a decline in earnings given the extreme selling and volatility of the past year. And, the market is now having to price in falling inflation which means that short-term and long-term rates should also move lower.

This will lead to some unwinding of the bearishness and selling that was triggered by higher rates. After all, the bulk of 2022 weakness can be explained by higher rates rather than economic or earnings weakness.

And just as the economy and earnings remained resilient for much of 2022 despite the numerous challenges, it's entirely possible that we could see something similar in 2023 which could be another catalyst for stock prices. Lower rates and inflations should translate into lower borrowing costs and higher margins for companies.

In summation, the economy and stock market are facing some serious challenges, but there's a growing chance that the positive tailwind from falling inflation is significant enough to overcome the negative headwind of a slowing economy.