The big things you need to know: First, our 12-month S&P 500 price target remains 7,750, and we assume the index has put in a fragile, foggy bottom. Second, we run through our thoughts on what we're hoping to learn more about in the upcoming reporting season. Third, other things that jump out include how 2026 EPS growth forecasts for most sectors have been frozen since the start of the war, and the decline in consumer expectations for stock market performance over the next 12 months.
Takeaway #1: How We're Thinking About the Outlook for the US Equity Market
Uncertainty in forecasting is unusually high and is likely to remain so for an extended period of time, but with a messy ceasefire in place, we thought it was a good time to reflect on how we're thinking about the outlook for US equities from here, focusing more on numbers than narrative.
Our 12-month S&P 500 price target remains 7,750, a gain of 13.6% from the April 9th close. 7,750 is in line with the median of the outputs of our investor sentiment, valuation/EPS, earnings yield gap, GDP, and Fed models, with three of those models clustered around that number.
Our models range from roughly 7,200 at the low end – that's from our GDP test which reflects the typical return of 5.7% in a 1.1–2% real GDP environment, to more than 7,800 at the high end – that's from our AAII sentiment test which generates a +15% forward return signal based on the deep levels of bearishness that have been in place recently.
Our valuation/EPS model is also worth calling out. This model forecasts a P/E based on inflation and interest rate assumptions, and projects a fair value for the S&P 500 by combining that with an EPS assumption and signals fair value at the end of 1Q27 of 7,759.
We removed consensus macro assumptions (which have been frozen) and consensus EPS assumptions (which have moved up) and put in more conservative metrics. We haircut consensus EPS for the next four quarters by 5%. On the P/E, we baked in headline inflation of 3.3% in 1Q27, no Fed cuts, and 10-year yields that move up to 4.5%.
The story the math tells is that the S&P 500 can stay on a path to 7,750 over the course of the next year, supported by a recovery in investor sentiment from deeply bearish levels, and a solid earnings growth and economic backdrop that don't incur too much damage as a whole from recent disruption to energy markets and the Middle East.
“As long as recession fears remain low, investors remain convinced the war will end soon, and earnings expectations don't take too much of a hit, we think the low is in.”
Lori Calvasina, Head of U.S. Equity Strategy, RBC Capital Markets
Near term, it appears to us that the S&P 500 has established a fragile, foggy bottom. S&P 500 and Russell 2000 valuations stopped looking expensive at the March low, but had not fallen to deeply compelling valuation levels that were a reason to buy the market on their own. This is important because if the fundamental narrative around the war or its impacts changes, there is room from a valuation perspective for stocks to fall again, perhaps even more than they did before. That being said, as long as recession fears remain low, investors remain convinced the war will end soon, and earnings expectations don't take too much of a hit, we think the low is in.
On positioning, we have a slight bias in favor of Large Cap Growth over Large Cap Value. We think US equity market performance will reflect trends in earnings over the next 12 months, and the earnings story is simply stronger for Growth than Value at the moment. Bottom-up consensus EPS growth forecasts remain stronger for Mag 7 than the rest of the market and 2027 Mag 7 EPS growth forecasts are showing acceleration vs. 2026, something we're not seeing for the rest of the market. We also expect energy market and middle east disruption to weigh more heavily on the non-Mag 7 areas.
While we don't have a strong view on US equities relative to non-US equities at the moment, we would continue to give a slight edge to the US, which is also supportive of Growth over Value within the US.
We are also nibbling on Small Caps. Some of the positives we see for Small Caps include the strong March jobs report, continued improvement in ISM manufacturing, and the removal of froth from both Russell 2000 valuations (which returned to their long-term average in March) and futures positioning (where CFTC data points to a slight net short in place but not oversold levels). Some of the negatives we see for Small Caps are the continuation of weaker earnings revisions trends relative to Large Caps, a lack of optimism about Fed cuts in 2026 among financial market participants generally and general concerns about the ripple effects of the war in the Middle East on the more cyclical parts of the US equity market.
