RBC Predicts 14% Surge in S&P 500: Can Markets Maintain Their Momentum?

New 7,750 target reflects stronger earnings, improved sentiment and a supportive interest-rate backdrop

RBC Capital Markets has raised its 12-month forecast for the S&P 500 to 7,750, signalling a potential 14% rise from late November levels. According to strategists led by Lori Calvasina, the new target reflects a combination of stronger investor sentiment, improving valuations, easing inflation expectations and resilient earnings growth.

Rather than a firm year-end prediction, RBC describes the new target as a “directional compass” based on five proprietary models analysing sentiment, valuation, earnings, the economic backdrop and monetary policy.

Why RBC Expects the S&P 500 to Rise

1. Investor Sentiment Points to Double-Digit Gains

RBC’s research shows that investor sentiment is still relatively muted despite recent market strength.

• The four-week AAII sentiment average sits between one and two standard deviations below long-term norms.
• Historically, this sentiment zone has been followed by average 12-month returns of 15%.

This suggests markets may continue grinding higher as investors gradually rebuild risk appetite.

2. Valuation Models Favour Higher Levels

RBC’s updated valuation model — which excludes the unusual distortions of the 2010s — supports a higher market.

• Expected P/E ratio: 25.7x.
• Assumptions include inflation easing into the mid-2% range, several modest Federal Reserve cuts, and 10-year bond yields near 4%.
• Combined with bottom-up EPS of $311, the model indicates fair value close to 8,000 on the S&P 500.

Valuations, therefore, remain a constructive tailwind.

3. Earnings Growth Aligns with RBC’s Target

Corporate America’s earnings outlook remains robust:

• Consensus expects 13% EPS growth over the next 12 months.
• RBC’s implied market return — nearly 14% — lines up neatly with that expected earnings trajectory.

Calvasina emphasises: “Our 7,750 target is entirely consistent with bottom-up profit expectations.”

4. Supportive Rates and Bond Models

While the equity risk premium is slightly negative, it remains in a historically positive zone for future equity returns.

• Periods featuring around 1% of Fed cuts over 12 months have historically produced average gains of 13.3% in the S&P 500.

Bond and rate models therefore lean supportive — though not aggressively so.

5. GDP Expectations Are the Only Dampener

Economic growth projections for 2026 are more subdued:

• Expected US GDP growth: 1.1%–2%.
• Historically, this range aligns with average market returns of 5.7% over 12 months.

This keeps RBC’s model at the lower end of its fair-value range — but not enough to offset the broader bullish picture.

What This Outlook Could Mean for Investors

The RBC forecast paints a constructive picture for equities heading into the next 12 months. For investors, several themes stand out:

Potential Opportunities

• Equities may remain attractive relative to bonds, especially if rates fall in line with expectations.
• Earnings resilience suggests large-cap US tech and diversified market leaders may continue driving returns.
• Sentiment-driven rallies often lift under-owned sectors — including mid-caps and cyclicals — as participation broadens.

Risks and Considerations

• Forecasts rely on continued disinflation and measured Fed cuts; any deviation could dampen valuations.
• Slower GDP growth may limit gains in more economically sensitive sectors.
• Markets already sit near record highs, so volatility spikes should be expected even within an upward trend.

Bottom Line for Investors

RBC’s 7,750 target suggests that the bull market still has room to run. Investors considering increasing exposure to US equities may find the next year favourable — but should balance opportunity with risk management, sector diversification and close monitoring of economic data.

Sources: (Investing.com, Reuters.com)