Welcome to RBC’s Markets in Motion podcast, recorded July 14, 2025. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
The big things you need to know: First, we are lifting our year-end 2025 S&P 500 price target to 6,250, essentially taking our price target back to where it was in mid-March. Second, there is no change to our 2025 S&P 500 EPS forecast of $258, which is slightly below consensus. We also review what we’ve learned from the early reporters, which makes us think it’s too early to stop worrying about tariff impacts. Third, we’re adding the momentum trade and earnings sentiment for mega cap growth to the list of things worrying us about the stock market near-term.
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Updating Our YE 2025 S&P 500 Price Target
- With the first half behind us and a fresh forecast update from our partners in RBC Economics, Rates Strategy, and FX in hand, we’ve done some housekeeping on the different models we use to derive our target, and have made an important change to our overall framework.
- The punchline is that we’ve raised our target significantly to 6,250.
- With this change, our price target essentially goes back to where it was in mid-March.
- The message we’re sending is that we feel neutral on the market in the back half of the year, and expect choppy conditions and swings in both directions.
- How did we get to 6,250?
- It’s midway between the median and average of the five different models we’re using right now.
- The structural change to our approach, which had the biggest impact on the overall number, is that we’ve given up trying to put a quantitative value on the policy backdrop for the US – previously we were baking in the 2018 return in the market as a value to model in the trade war which was a decline of more than 6%.
- But the stock market is no longer trading in sync with Trump’s polling numbers, and investors have been telling us that they’ve moved on from 2025 and are trading based on 2026.
- So we’ve replaced our policy assumption with one based on next year’s GDP signal – that points to an 8% on a full year basis for the S&P 500, or a level in the mid 6,300 range.
- Two of our models point to roughly 5,700 on the low end – these are our usual GDP test (which looks at how stocks perform during years when GDP is in the 1.1-2% range, a decline of more than 3%)...
- Along with our valuation/earnings analysis (which uses house views on inflation and interest rates to derive a trailing P/E target at year-end, and then layers in our own EPS forecast).
- Meanwhile, two of our models are pointing to roughly 6,500 at the high end – one is our earnings yield gap model which looks at the difference b/tw the S&P 500 earnings yield and the 10 year Treasury yield and the 6 month forward return from current levels.
- The other bullish model is our sentiment model – which looks at AAII net bulls and 6 month forward returns off current levels.
- Both of those models point to a 2nd half gain in the mid to high 4% range.
- We know that’s a lot of math to work through. The bottom line is that our messaging from the last few weeks is unchanged – the stock market is looking a bit overvalued to us on 2025 fundamentals, and has some but not a lot of room left on our more bullish models.
- Net bulls on the AAII survey haven’t hit 1 standard deviation above the long-term average yet, and we are watching that indicator closely for signs of a top.
Moving on to Takeaway #2: There’s Been No Change to Our 2025 S&P 500 EPS forecast of $258
- We’ve refreshed our S&P 500 EPS model for the latest house views on GDP, inflation and rates. Generally, our teams see GDP in the mid 1% range, inflation just under 3% at the end of the year, 10 year yields a bit over 4%, and Fed cuts starting in December.
- The punchline is that we are sticking with our $258 forecast for 2025, which is a bit below the bottom-up consensus of $265.
- Macro wise, the interest rate backdrop is less favorable than our last update in the back half of 2025. We have also baked in a slightly more favorable margin backdrop for stocks in the 2nd half, removing our assumption for some very modest contraction, and the two essentially offset one another.
- On the upcoming reporting season, two quick thoughts.
- First, the rate of upward EPS estimate revisions in the S&P 500 has moved to the mid 50% range, a typical non-crisis high making us worry the recent healing in earnings sentiment could be about as good as it gets for a while.
- Second, we spent some time reading through the earnings calls of companies across the market cap spectrum that have reported since the last week in June. Though there have been a couple of company bright spots that have gotten a lot of attention, it hasn’t been all sunshine and roses. Uncertainty over tariffs, hesitancy, pricing and inflation were all in focus and we were struck by some descriptions of the disruption to demand in the quarter. We’ll be paying close attention to what companies are saying about pricing, inventories, demand (both pull-forward and the freeze from uncertainty), and cost management in coming weeks. One idea lurking in the back of our mind is that adverse impacts from tariffs may end up getting pushed into 2026, and we’ll be looking for information that either supports or counters that notion.
Wrapping up with takeaway #3: new worries.
- The first of these is that the momentum trade appears to be fading – since 2024, when this happens it tends to come ahead of a drawdown in SPX with a lead time of a few days to a month. We saw this ahead of April’s tariff tantrum as well as the other 4-8% drawdowns that have occurred.
- The second is that mega cap growth performance and EPS revisions leadership often fades in reporting season.
- A third is that in just 3 months since the April 8th low, the snapback in the S&P 500 has done what we typically see in a 9-month recovery period off of a major non-recession low.
- Other worries we’ve talked about before are poor equity market seasonality in August and into the fall….
- And the possible dialing down of Fed cuts which has been an important part of the bull thesis in US equities recently.
That’s all for now. Thanks for listening, and be sure to reach out to your RBC representative with any questions.