RBC Capital Markets Elevates S&P 500 Forecast to 7,900 Amid AI-Driven Growth

TLDR

• 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 points to a bifurcated economic landscape where artificial intelligence companies outperform while traditional sectors struggle
• U.S. healthcare stocks received a downgrade to Market Weight amid negative earnings trends and investor withdrawals
• Key concerns include elevated chip sector valuations and escalating Middle East tensions

On Friday, RBC Capital Markets announced an upward revision of its S&P 500 price forecast to 7,900, marking an increase from the previous 7,750 estimate. Lori Calvasina, who leads U.S. strategy for RBC, established the updated projection.

This revision follows the S&P 500’s impressive rally of over 16% since hitting a low point on March 30. With Thursday’s session ending at 7,335.66, the fresh target represents approximately 7.7% potential appreciation from current levels.

RBC’s updated forecast relies on its proprietary valuation and earnings-per-share framework rather than combining results from all five of its analytical models. The strategists explained this particular methodology better accounts for what they describe as a “two-speed economy.”

This concept reflects a divergence within the marketplace. Companies tied to artificial intelligence continue delivering robust earnings performance, whereas other components of the index encounter challenges stemming from the continuing Middle East crisis.

RBC implemented a 5% reduction to bottom-up earnings projections for Q1 2027, resulting in approximately $329 per share. Earnings forecasts for AI-connected firms remained aligned with market consensus, while estimates for the broader index were trimmed by 7.5%.

Macro Assumptions Behind the Target

Regarding macroeconomic variables, RBC incorporated an inflation rate of 3.3%, exceeding consensus expectations. The firm’s model also assumes the Federal Reserve will maintain current interest rate levels and projects 10-year Treasury yields around 4.5%.

These parameters generated an implied trailing price-to-earnings ratio of approximately 24 times earnings.

RBC acknowledged that combining all five analytical models yields a more aggressive target of 8,100. However, the firm selected 7,900 as its formal prediction, believing it appropriately balances potential rewards against existing market risks.

This adjustment aligns with comparable target increases from J.P. Morgan and Barclays during the previous month. Both institutions referenced diminishing geopolitical concerns and strengthening earnings trends in their rationale.

RBC maintained its strategic preference for growth-oriented securities over value stocks within large-cap equities. The firm also continues favoring domestic U.S. stocks relative to international markets while expressing measured optimism toward small-capitalization companies.

Healthcare Downgraded

Alongside its target elevation, RBC implemented a sector-level adjustment. The firm lowered its stance on U.S. healthcare equities to Market Weight from the previous Overweight designation.

This downgrade stems from worsening earnings revision trends, substantial capital outflows from healthcare-focused funds, and disappointing findings in RBC’s latest analyst sentiment survey.

RBC identified multiple headwinds to its forecast. These encompass possible negative adjustments to 2027 earnings expectations and inflated valuations within the semiconductor industry.

The investment bank characterized the Middle East situation as the primary tail risk capable of triggering a U.S. economic contraction. Nevertheless, it observed that most publicly traded corporations have indicated their ability to navigate through current disruptions.

Last month, the S&P 500 recorded its strongest monthly percentage advance since November 2020.

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