Welcome, to RBC’s Markets in Motion podcast, recorded September 15th, 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 thing you need to know: We are introducing preliminary forecasts for the S&P 500 for 2026 of 7,100 (a 2H26 price target) and $297 (full-year 2026 S&P 500 EPS). We think they should be viewed as a very early indication of how our models are tracking at the moment.
If you’d like to hear more, here’s another five minutes.
Our Main Takeaway Today: What Our Models Are Currently Signaling for the S&P 500 in 2026
As we met with a variety of US equity investors last week – ranging from hedge funds to high-net-worth retail, from high level macro investors to stock pickers, and everything in between – it became clear to us that it’s time to start talking more about 2026. When we discussed the complex cross currents for stocks in the coming months, the conversations quickly turned to the longer set-up.
With this in mind, we’ve taken a look at what the five models we’ve been using for our 2025 price target are signaling for next year. As always, our 2026 price target is a quantitative exercise driven by the math. The median of the outputs of our five models comes out to roughly 7,100, which we are setting as our preliminary 2026 price target. Given that some of our models are based on 12-month-forward returns and others are based on full-year calendar returns, we are thinking of this number as a 2H26 level for the S&P 500 to arrive at rather than a destination that’s achieved exactly on December 31st, 2026. The range of outcomes is roughly 6,400 to 7,600. The wide range suggests to us that the forecasting environment remains more uncertain than we’d like in the year ahead.
Our Sentiment and Cross-Asset models are sending the most constructive signals.
On Sentiment, we leverage the idea that the low level of net bullishness currently seen in the AAII survey has historically been a constructive signal for the stock market on a 12-month-forward basis. In this instance, the latest reading (between 1 and 2 standard deviations below the long-term average) is pointing to a 15% gain in the S&P 500 over the next 12 months, implying a 2H26 price level of a little less than 7,600 for the S&P 500 if we use Thursday’s close price as a starting point. That’s the most constructive model in our arsenal for 2026.
On Cross-Asset, we rely on our earnings yield gap model, which reminds us that the S&P 500 has, on average, risen 12.7% over the next 12 months when the gap between the S&P 500’s earnings yield and the 10-year Treasury yield has been in the range that it resides in today. Has the case for stocks eroded relative to bonds, compared to what we’ve seen in the past? Yes, but not enough to suggest the stock market should fall on a 12-month forward basis. Our earnings yield gap model would likely start to send a negative signal for stocks, in terms of direction, if the 10-year yield crosses 5%.
Shifting to the economic backdrop, our GDP test that looks at how the stock market performs during 1.1-2% real GDP years (a range in line with the 2026 forecasts of both consensus and RBC Economics of 1.7% and 1.4%, respectively, for 2026 itself) points to a slightly negative return (-3.4%) for 2026 in the S&P 500. But if we shift our attention to the economic backdrop of the following year (consensus anticipates 2% real GDP growth for 2027), the outlook seems brighter as the S&P 500 moves up 8% on average in years that precede 1.1-2% real GDP.
The fifth and final component of our 2026 analysis combines the results of our S&P 500 EPS model with our trailing P/E model. For full-year 2026 S&P 500 EPS, we are introducing a forecast of $297, a bit below the bottom-up consensus of $305. We think it’s reasonable to assume the bottom-up consensus is too high right now, as that’s normally the case at this point in time. We are baking in some margin expansion for 2026 as well as an effective tax rate of around 18.5% – in line with 1H25 levels and better than 2024 levels.
Note that our P/E modeling is quant driven, based on the relationship of the average S&P 500 trailing P/E with CPI and interest rates dating back to the 1960s. To forecast their own respective outputs, both our earnings and P/E models leverage RBC Economics/Rates Strategy views on inflation, GDP, and the Fed, which they describe as a “stagflation-lite” scenario, and a terminal Fed Funds rate of 3%.
As our regular readers are aware, we think about price targets differently than many strategists. We view our price target as a compass, not a GPS, and as a signaling mechanism about the path that we currently see the stock market on from a variety of angles. Just like any analyst who covers the stock of an individual company, we plan to revise our 2026 forecast as new information comes to light or if our target no longer reflects our views about the trajectory that the stock market is on. The message we are trying to send with our analysis today is that the S&P 500 appears to be on a path higher over the next 12 months and into the 2nd half of 2026.
On that note, we are also taking the opportunity today to make a modest adjustment to our YE 2025 S&P 500 price target, nudging it up from 6,250 to 6,350. The main driver of this change is our updated 2025 S&P 500 EPS forecast, which we have lifted from $258 to $269 ($1 below the bottom-up consensus forecast). The EPS upgrade reflects the upside surprise in 2Q25, as well as more optimistic assumptions on margins and tax for the back half of the year.
Although we are nudging our 2025 price target up a little, and articulating one for 2H26 that anticipates a move higher in the S&P 500 over the next 12-15 months, we do remain on guard for choppy conditions in US equities between now and year-end 2025. Our main concerns have been poor seasonal patterns in September and October in recent years as well as stalling valuations in the S&P 500, top 10 market cap names, and Nasdaq 100 (the workhorses of the US equity market with the best fundamentals) which have struggled of late to break through their previous peaks.
We are also mindful of the sudden drop in AAII net bulls that emerged in August, which despite the positive longer-term set-up that it communicates about the stock market, is a similar move to what we saw in 1Q25 and has been a leading indicator of short-term stock market declines in recent years.
There’s been a lot of conversation about the support that retail investors have provided to the US equity market this year, but some of the indicators we watch to gauge sentiment in that part of the market are showing some signs of fatigue (flows to passive US equity funds by retail investors and bitcoin).
We are also concerned that the US equity market is priced for perfection at a time when uncertainty about the fundamental backdrop is percolating from a few angles. S&P 500 company commentary on earnings calls during the last reporting season has kept us in the camp that the real test from tariffs from a US corporate profitability, inflation / cost pressure and demand perspective is coming up in 3Q/4Q (in particular, we think there’s much to learn about the state of inventory and pull-forward dynamics), and questions about the health of the labor market have been sparked by recent government and private data releases.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.