Key Takeaways
- RBC Capital Markets increased its 12-month S&P 500 forecast from 7,750 to 7,900
- The revised projection suggests potential upside of 7.7% from Thursday’s closing level of 7,335.66
- The firm highlights a “two-speed economy” where artificial intelligence companies power ahead while traditional sectors struggle
- The healthcare sector received a downgrade to Market Weight amid negative earnings trends and investor withdrawals
- Key concerns include elevated semiconductor stock valuations and ongoing Middle East tensions
On Friday, RBC Capital Markets announced an upward revision to its S&P 500 price projection, moving the target to 7,900 from the previous 7,750. Lori Calvasina, who leads U.S. strategy at RBC, established the updated forecast.
This adjustment follows the S&P 500’s impressive rally of over 16% since hitting bottom on March 30. With Thursday’s close at 7,335.66, the revised target represents approximately 7.7% additional growth potential.
RBC’s updated projection relies on its valuation and earnings-per-share framework instead of averaging its five different forecasting methodologies. The strategists explained this approach better captures what they describe as a “two-speed economy.”
This concept describes a market divided into two camps. Technology firms focused on artificial intelligence continue delivering robust earnings results, while companies across the broader market contend with challenges stemming from the persistent Middle East crisis.
The firm applied a 5% reduction to bottom-up earnings projections for Q1 2027, arriving at approximately $329 per share. While AI-focused company estimates remained unchanged from consensus views, forecasts for non-AI segments were reduced by 7.5%.
Economic Factors Supporting the Projection
Regarding macroeconomic variables, RBC incorporated an inflation rate of 3.3%, running higher than market consensus. The bank also assumed the Federal Reserve would maintain current interest rates unchanged and projected 10-year Treasury yields at 4.5%.
These assumptions generated an implied trailing price-to-earnings ratio of approximately 24 times earnings.
RBC acknowledged that combining all five of its forecasting models would suggest a more bullish target of 8,100. However, the firm settled on 7,900 as its formal projection, stating this figure more accurately balances potential downside risks against remaining growth opportunities.
This target increase aligns with recent moves by J.P. Morgan and Barclays, both of which raised their forecasts last month. Those firms pointed to diminishing geopolitical concerns and strengthening earnings trends as justification.
RBC maintained its preference for growth stocks versus value names within large-cap equities. The firm also continues favoring domestic stocks over international alternatives while maintaining a moderately constructive stance on small-cap shares.
Healthcare Sector Receives Downgrade
Alongside the target increase, RBC implemented a sector-level adjustment. The firm lowered its stance on U.S. healthcare equities to Market Weight from the previous Overweight rating.
This downgrade reflects worsening earnings revision trends, significant investor capital outflows, and disappointing findings in RBC’s latest analyst survey.
RBC identified multiple risks to its forecast. These encompass possible downward adjustments to 2027 earnings expectations and excessive valuations within the semiconductor industry.
The bank identified the Middle East situation as the primary tail risk that could potentially trigger a U.S. economic downturn. Nevertheless, RBC noted that most publicly traded corporations have indicated they possess sufficient flexibility to navigate the current disruptions.
Last month, the S&P 500 recorded its strongest monthly percentage advance since November 2020.
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