The S&P 500 just posted its worst “first nine months” performance since 2002. It certainly feels like it. And sentiment indicators suggest investors don’t see improvement on the horizon.

But some analysts, like BMO’s Brian Belski, expect a strong surge in the 4^th quarter and believe the S&P 500 could be headed back above 4,800 to new record highs by the end of this year. As the S&P500 is at about 3,600 now, his analysis suggests a 33% jump from today’s level.

How can that be, given the pessimistic tone of the markets right now? What is Belski seeing that causes him to be so bullish?

Belski says that despite the economic backdrop, North American stock markets are poised to rebound. A drop in earnings is to be expected this year, but that has already been priced in by the markets. Looking forward, he is seeing some of the healthiest corporate balance sheets he has seen in his career. Most businesses, he added, are doing exceptionally well right now.

“In my 33 years in business. I have never seen the type of balance sheet stream cashflow, consistency and earnings stability – never from small, medium and large cap publicly traded companies – that I'm seeing today,”he said.

Further, he’s seeing 12-month forward inflation expectations drop quickly. Since the stock market typically leads earnings, which lead GDP growth, he concludes that the economic downturn may be nearing its end.

Historically, sharp inflation spikes are often strong buy signals. In six of the seven biggest inflation spikes since the 1940s, once the consumer price index peaked, the stock market was near its low point.

“If you buy at the peak (inflation), you do pretty darn well over the next 12 months,” says Jim Paulsen, Chief Investment Strategist of the Leuthold Group. Waiting until inflation is under control will miss the early market gains.

There are seven major trends that could drive that symmetrical decline in inflation.              

1. Energy prices are down sharply

2. Commodity prices are falling fast

3. Rents are now dropping

4. Retailers are slashing prices to clear excess inventory

5. Supply chains are improving

6. Businesses are failing to raise prices

7. Labor market dynamics are improving

“Just the perception that the Fed is done raising rates would be enough to mark the bottom in the bear market and lead to a sustainable rally,” says Dr. Ed Yardeni, President of Yardeni Research. Declining inflation leads to a boost in consumer confidence, helping to avert a severe recession, if a recession occurs at all.

In fact, Fundstrat has been arguing that today’s market is similar to what investors experienced in August 1982 — a moment that preceded a fierce rally in equity markets amid a pivot from the Fed.

In the summer of '82, the U.S. economy was in the throes of high inflation and a deep recession. Its then-Chairman, Paul Volcker had been focusing the Fed’s efforts on slowing inflation by raising interest rates aggressively. Then in October of that year, Volcker signaled that the Fed could temper its efforts.

Two months before the pivot, markets sniffed out the Fed's plans — and in just four months erased all losses from a 22-month bear market that had seen the S&P 500 fall 27%.

Of course, there’s no way to know if a rebound like this will happen before year end, but the exact timing of the reversal is secondary. The key point to understand is how quickly sentiment – and investment markets – can change.