RBC Capital Markets believes the S&P 500 still has room to move higher over the next year, setting a 12-month target of 7,900, which represents approximately 7.7% upside from early May levels.
Even so, the firm warned that investors should be prepared for periods of market weakness along the way.
Lori Calvasina, RBC Capital’s chief U.S. equity strategist, said the bank does not expect stocks to rise in a straight path, but added that any downturn would likely amount to no more than “a tier 1 garden-variety pullback in the 5-10% range.”
RBC views the probability of a larger 14% to 20% market decline as relatively low unless concerns about a recession begin to intensify again.
The bank’s outlook is built around what it called an “AI in the fast lane, Middle East in the slow lane” environment, where artificial intelligence-related companies continue delivering strong growth while geopolitical tensions create broader economic uncertainty.
As part of its model, RBC reduced first-quarter 2027 consensus earnings expectations by 5%, while assuming profit growth of 28% for AI-focused businesses and 6% growth for the remainder of the S&P 500.
Its projections also assume consumer inflation of 3.3%, no additional Federal Reserve rate changes, and a 10-year Treasury yield of 4.5%.
According to RBC, if inflation rises to 3.8%, the Fed resumes tightening policy, and 10-year yields increase to 5%, the firm’s estimate of fair value for the S&P 500 would fall to between 7,400 and 7,500.
Potential drivers of a short-term market pullback include weaker earnings revisions tied to geopolitical conflict, profit-taking in semiconductor shares, uncertainty around U.S. midterm elections, and rising interest rates.
RBC said higher borrowing costs generally hurt stocks more through lower valuation multiples than through direct pressure on earnings.
The bank maintained its favorable view on Growth stocks compared with Value shares and continued to prefer U.S. equities over international markets.
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