RBC Sees Further S&P 500 Upside Despite Risk of Short-Term Pullbacks
RBC Capital Markets has issued a 12-month target of 7,900 for the S&P 500, implying approximately 7.7% upside from early May levels. While maintaining an overall bullish outlook on U.S. equities, the firm warned that temporary market corrections may still occur in the near term.
RBC Expects Only Modest S&P 500 Corrections
Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital, said the bank does not expect the S&P 500’s upward trajectory to move in a straight line. However, she believes any downside would likely remain limited.
According to Calvasina, potential pullbacks would probably resemble a typical market correction in the 5% to 10% range rather than a severe downturn.
RBC added that a larger decline of 14% to 20% appears unlikely unless recession fears return and significantly weaken investor sentiment.
AI Growth Continues to Support RBC’s Bullish Forecast
The firm’s S&P 500 target is based on a model described as “AI in the fast lane, Middle East in the slow lane,” reflecting a two-speed economic and earnings environment.
RBC assumes strong earnings momentum from artificial intelligence-related companies while expecting slower growth across the broader market.
Its projections include:
- 28% earnings growth for AI-focused companies
- 6% earnings growth for the remainder of the S&P 500
- Consumer inflation averaging 3.3%
- A stable Federal Reserve interest rate policy
- U.S. 10-year Treasury yields around 4.5%
Using these assumptions, RBC slightly reduced consensus earnings-per-share estimates for the first quarter of 2027 by 5%.
Higher Inflation Could Pressure Stock Valuations
RBC warned that rising inflation could alter the market outlook significantly.
If inflation climbs to 3.8%, the Federal Reserve resumes raising interest rates and Treasury yields approach 5%, the bank estimates fair value for the S&P 500 would decline toward the 7,400–7,500 range.
This suggests tighter monetary policy remains one of the biggest risks for equity valuations.
Factors That Could Trigger a Market Pullback
The investment bank identified several possible catalysts that may lead to short-term weakness in stocks, including:
- Lower earnings forecasts for late 2026 or 2027 due to geopolitical conflicts
- Profit-taking in semiconductor and AI-related shares
- Uncertainty surrounding U.S. midterm elections
- Higher interest rates reducing valuation multiples
RBC noted that rising rates tend to affect stock prices more through lower valuation multiples rather than direct pressure on corporate earnings.
RBC Still Prefers Growth Stocks and U.S. Equities
Despite acknowledging near-term risks, RBC maintained its preference for Growth stocks over Value stocks.
The firm also continues to favor U.S. equities compared with international markets, reflecting confidence in American corporate earnings strength and continued AI-driven expansion.
