RBC Capital Markets has grown more cautious on the near-term outlook for U.S. equities, warning that the S&P 500 could experience a pullback of five percent to 10 percent.
Lori Calvasina, head of U.S. equity strategy at RBC, identified three primary drivers of near-term risk. First, September seasonality: the S&P 500 has declined in five of the past 10 Septembers. Second, the U.S. midterm elections, which typically introduce volatility in the latter half of the year. Betting markets increasingly predict a Democratic sweep—an outcome RBC's analysis suggests is less favorable for equities. Third, the unresolved Iran war, which Calvasina said has weighed on consumer sentiment.
Additional headwinds include lingering investor concerns over inflation, Federal Reserve policy, and interest rates. Small-cap stocks have underperformed since late June, coinciding with rising expectations for rate increases.
Despite near-term caution, Calvasina reiterated RBC's bullish 12-month S&P 500 target of 8,150—approximately six percent above the S&P 500's Sept. 8 closing level of 7,674. "We still see a number of reasons to stay optimistic," Calvasina said. All five models RBC uses to derive its target indicate gains over the coming year.
