Welcome to RBC’s Markets in Motion podcast, recorded March 17th, 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’ve lowered our YE 2025 S&P 500 price target to 6,200 from 6,600, Second, we’ve lowered our 2025 S&P 500 EPS forecast to $264 from $271. Among other adjustments, our new price target and EPS forecast embed the updated views of RBC’s Economics and Rates strategy team which were released last week. Third, we have updated our year-end 2025 bear case for the S&P 500, which we’ve lowered from 5,775 to 5,550. Fourth, we run through the latest developments on the different categories of “vibes” that we’ve been tracking, which generally continued to show evidence of deterioration in last week’s updates. A few are starting to look too extreme to us (in terms of their negativity), but others have more room to go lower.
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1, we’ve lowered our YE 2025 S&P 500 price target to 6,200 from 6,600 (a cut of 6%).
- Among other adjustments, our new price target embeds the updated views of RBC’s Economics and Rates strategy team which were released last week for stickier inflation, real GDP in 2025 of 1.6% (down from 2%), and 10-year yields that move lower from here and then end the year around 4.2%.
- 6,200 is the median of five models that we use to come up with our forecast. There’s a wide range of outputs in our modeling, around 5,600 to 6,500, highlighting the high degree of uncertainty in the stock market at the moment.
- Our sentiment model is one of two that spits out a projection right in line with our new target price. It’s sending a contrarian buy signal right now. AAII net bulls are more than two standard deviations below the long-term average, a level that typically sees the S&P 500 rise by more than 10% over the subsequent 9 months.
- By contrast, our GDP model is producing the most pessimistic output. When real GDP is in the 1-2% range, as our economists now anticipate, the S&P 500 has typically fallen more than 3% for the year, which would the index a bit above 5,600.
- Our trailing P/E model, which bakes in house views on inflation, the 10 year, and the Fed, also projects the index to end the year at a 21.8x trailing P/E or around 5,750, which like our GDP models is on the more pessimistic end of our modeling.
Moving on to Takeaway #2, we’ve lowered our 2025 S&P 500 EPS forecast to $264 from $271 (a cut of 2.5%).
- The bottom-up consensus was still around $271 as of Friday. We anticipate downward revisions are on the way. Right now, the rate of upward EPS estimate revisions in the S&P 500 is about 42% and company commentary suggests many, though not all, are not baking anything in on tariffs.
- Our EPS model is a top-down income statement that relies heavily on macro forecasts, and we’ve baked in the new RBC house views on the economy, inflation, and interest rates there as well.
- We’ve also lowered our margin assumptions for 2025, taking them from modest expansion to flat.
- Interest expense is coming down in our modeling in 2025 vs. 2024 due to lower interest rates, which helps the EPS number, but not enough to offset the softer GDP and margin assumptions.
Next up, takeaway #3, we have updated our year-end 2025 bear case for the S&P 500, which we’ve lowered from 5,775 to 5,550.
- Our 6,200 price target assumes the S&P 500 won’t go too much lower than where it closed last week, and we acknowledge that not a terribly high conviction view.
- And so we’ve been tracking a bear case closely, which essentially is a shadow target if the recent lows don’t hold and the stock market experiences a growth scare, which we define as a pullback in the 14-20% range – similar to the drawdowns of 2010, 2011, 2015-2016, and 2018 around the European debt crisis, the US debt downgrade, the industrial recession, and the first China trade war.
- In our bear case analysis, we take four of the models that we use in our price target process, models, and bake in assumptions that are worse than what we’ve got in our base case.
Wrapping up with Takeaway #4, we run through the latest developments on the different categories of “vibes” that we’ve been tracking.
- We generally continued to see evidence of deterioration in last week’s updates.
- A few are starting to look too extreme to us (in terms of their negativity), but others have more room to deteriorate.
- In terms of investor vibes: as noted earlier, AAII net bulls, a gauge of retail investor sentiment, is back to financial crisis lows, but can admittedly get stuck at deeply bearish levels. On the institutional investor side, CFTC asset manager positioning in US equity futures is early innings in terms of coming down.
- The options market indicators we track are showing signs of rising angst, with an elevated VIX, but a lack of real fear, with a subdued TDEX.
- On consumer vibes: The University of Michigan survey was weak again, across all cohorts. We are starting to notice that headline sentiment is starting to approach historical lows.
- On small business vibes: NFIB reported slippage in optimism and optimism on the economy specifically, which have been around all time highs, but also an increase in uncertainty, which is nearly back to all-time highs, with capex and employment expectations softening.
- On corporate vibes: Sentiment in the Business Roundtable survey, fell slightly, with capex and hiring plans softening a bit here as well.
- Finally, on political vibes: Trump’s net job approval has turned slightly negative, while his net favorability remains in slightly negative territory – we’ve been keeping a close eye on trends in the latter as it’s become aligned with S&P 500 price action.
That’s all for now. Thanks for listening. And be sure to reach out to our RBC representative with any questions.