RBC Capital Markets has become more cautious about the near-term outlook for U.S. stocks, warning that the S&P 500 could experience a correction of as much as 10%.
Despite the short-term risks, the bank remains bullish over the next 12 months and continues to expect the index to move higher over the longer term.
RBC Sees Risk of a 5% to 10% S&P 500 Pullback
RBC Head of U.S. Equity Strategy Lori Calvasina said the risk of a normal market pullback of between 5% and 10% has increased as the fall trading period begins.
The strategist highlighted three main factors that could create additional volatility for the S&P 500 in the coming months.
1. September Seasonality Could Pressure Stocks
The first concern is seasonal weakness.
According to RBC, September has ended lower for the S&P 500 in five of the past 10 years.
September has historically been a challenging period for equities, meaning existing concerns surrounding inflation, monetary policy and geopolitical risks could amplify normal seasonal volatility.
2. U.S. Midterm Elections Could Increase Volatility
The upcoming U.S. midterm elections represent another potential source of uncertainty.
RBC noted that markets have historically experienced increased volatility during the second half of midterm election years.
Politics surrounding artificial intelligence could also become increasingly important. Calvasina said opposition to parts of the AI investment boom has emerged as an election issue.
Meanwhile, prediction markets have increasingly pointed toward the possibility of a Democratic sweep.
RBC’s analysis suggests such an outcome could be less favorable for financial markets, adding another layer of political uncertainty for investors.
3. Iran Conflict Weighs on Consumer Confidence
The ongoing conflict involving Iran represents the third major risk highlighted by RBC.
Calvasina said the unresolved war has negatively affected consumer sentiment, potentially creating another challenge for the U.S. economy and equity markets.
Prolonged geopolitical uncertainty could also affect inflation, energy prices and investor risk appetite.
Inflation and Fed Policy Remain Additional Risks
Beyond those three primary concerns, investors continue to worry about inflation, Federal Reserve policy and interest rates.
Expectations for higher rates have increased in recent months.
RBC pointed to the underperformance of small-cap stocks since late June as one sign that markets are becoming more sensitive to higher borrowing costs.
Small companies can be particularly vulnerable to rising rates because they often depend more heavily on external financing.
RBC Maintains Bullish 12-Month S&P 500 Target
Despite the possibility of a short-term correction, RBC remains optimistic about the broader market outlook.
The bank maintained its 12-month S&P 500 target of 8,150, representing approximately 6% upside from the September 8 closing level.
Calvasina said RBC continues to see several reasons for investors to remain constructive on U.S. equities.
All Five RBC Models Still Point Higher
RBC uses five different models to determine its S&P 500 target.
According to Calvasina, all five currently indicate additional gains over the next 12 months.
That creates a mixed outlook for investors.
The S&P 500 could face a 5% to 10% correction in the near term as seasonal, political and geopolitical risks intensify. However, RBC still expects the broader upward trend to resume over the following year.
For investors, the key question will be whether any short-term weakness develops into a deeper downturn or simply represents a normal correction within a longer-term bullish market.
