RBC Capital Markets has set an ambitious 12-month target of 7,900 for the S&P 500, suggesting a potential increase of about 7.7% from early May levels. Although the firm maintains a generally positive outlook for the index, it cautions that the market could experience short-term setbacks.
Lori Calvasina, who leads U.S. equity strategy at RBC, indicates that while the market is poised for growth, the path to that target may not be linear. She anticipated that any pullback would likely be a “garden-variety” decline within the 5-10% range. A more severe drop, estimated between 14% and 20%, would require the emergence of renewed recession concerns.
RBC’s projections are based on a framework they describe as “AI in the fast lane, Middle East in the slow lane.” This approach captures an environment where sectors tied to artificial intelligence are expected to outperform, while geopolitical tensions hinder broader economic activity. As part of this framework, RBC has reduced its bottom-up consensus estimate for earnings per share for the first quarter of 2027 by 5%. It forecasts earnings growth of 28% for AI-related companies and a modest 6% for the rest of the index. Their expectations also include a consumer inflation rate of 3.3%, no additional changes in Federal Reserve interest rates, and a 10-year Treasury yield at 4.5%.
However, should inflation rates accelerate to 3.8%, with the Federal Reserve potentially resuming interest rate hikes and 10-year yields rising to 5%, RBC predicts a decline in the estimated fair value of the S&P 500 to a range of 7,400 to 7,500.
Potential triggers for a near-term correction have been identified by RBC, including downward revisions to earnings forecasts for late 2026 or 2027 due to war-related disruptions, profit-taking particularly in semiconductor stocks, uncertainty surrounding the upcoming U.S. midterm elections, and rising interest rates. The firm highlights that higher interest rates typically exert more pressure on equities through valuation compression than through direct impacts on corporate earnings.
Additionally, RBC has reiterated its preference for Growth stocks over Value shares, along with a focus on U.S. equities instead of international markets.
