Why stock prices are rising and what experts say comes next

High inflation, interest rate hikes and recession worries pummeled stocks last year.

The market has rebounded in 2023, though, even as each of those problems continues to vex the economy. Compounding those concerns, the banking sector underwent a crisis last month and a debt ceiling dispute in Congress risks financial distress.

Still, the tech-heavy Nasdaq has climbed more than 15% this year, while the S&P 500 has jumped more than 7%. The Dow has ticked up about 2% since the outset of the year.

The gains in recent months owe in part to the poor performance last year, since investors already responded to the grim economic conditions with a sell-off, stock analysts told ABC News.

Investors flocked back to the market as inflation eased and rate hikes slowed, even if those market headwinds persist and the threat of a recession looms, they said.

"The stock market is obviously performing better than the vast majority of people would've expected," Tom Essaye, president of financial data firm Sevens Report Research, told ABC News.

"The market has proven very impressively resilient, despite bad news," he added.

Analysts differed about the outlook for stocks going forward, however, as some said they expect the rally to endure for the remainder of the year while others predicted a recession that would render the good times short-lived.

Over the last year, the Federal Reserve has imposed an aggressive string of interest rate hikes last seen in the 1980s.

The policy aims to slash inflation but risks slowing the economy and bringing about a recession.

So far, the approach has succeeded in cooling price hikes but fallen short of the Fed's goal.

Consumer prices rose 5% last month compared to a year ago, extending a monthslong slowdown of price increases but leaving inflation more than double the target rate of 2%.

The progress in slashing inflation has left investors confident that the Fed will soon stop raising interest rates and may even begin to lower rates by the end of the year, analysts told ABC News.

"The theme we're seeing in 2023 is 'The end is near,'" Adam Turnquist, chief technical strategist at LPL Financial, told ABC News.

Softening inflation and rate hikes have coincided with resilient economic performance, fueling investor optimism, analysts said.

The U.S. added 236,000 jobs in March, which marks robust job growth but a reduction from an average of 334,000 jobs added each month over the previous six months, according to government data released last week.

Meanwhile, U.S. retail sales fell moderately in February but remained solid, suggesting that households still retain some pandemic-era savings.

When asked about rising stock prices this year, Tigress Financial market analyst Ivan Feinseth said: "The key fundamental reason is the economy is still strong. The world hasn't come to an end."

Still, the economy remains under threat of a recession.

Fed economists said in March that they anticipate a "mild" recession later this year, escalating a previous forecast, central bank meeting minutes showed.

Sixty-five percent of economists expect a recession within the next year, according to a Bloomberg survey last month.

Still, many stock investors hold out hope that the economy could avert a downturn or expect that a mild recession would cause little economic upheaval, said Turnquist, of LPL Financial.

"We're seeing a message from the market that we could still potentially avoid a recession," he said.

Some analysts said each of the major stock indexes would end the year at a higher price than its current level, since resilient economic activity would buoy corporate profits, the key focus for stock forecasters.

"The market is teetering on a major breakout," said Feinseth, of Tigress Financial. "I think we're going to see a powerful second half of the year."

Essaye, of Sevens Report Research, offered a more pessimistic outlook, saying the S&P 500 could fall as much as 10% by the end of the year if the economy turns downward.

"It's extremely difficult to execute a soft landing," he said, referring to an outcome in which the Fed raises rates to bring down inflation but avoids causing a recession. "There has only been one executed successfully in the last 40 years."

Despite the glum forecast, Essaye said the current moment offers an opportunity for patient investors to jump into the market.

"We're pricing in the bad news now and getting ready for a positive surprise in the long term," he said. "The U.S. economy isn't going to break."

ABC News' Elizabeth Schulze contributed to this report.