The big things you need to know: First, we have lifted our 12-month-forward S&P 500 price target to 7,900, which represents a 7.7% gain from the May 7th close. In adjusting our forecast, we are focusing on our valuation/EPS model, which does the best job of baking in a two-speed economy and earnings backdrop. Second, on bigger-picture positioning, we continue to prefer Growth over Value, US over non-US, and like Small Caps (but not as much as Large Cap Growth). Our sector views are mostly unchanged, but we have lowered Health Care to market weight from overweight. Third, we run through the strong stats from 1Q26 reporting season.
If you’d like to hear more, here’s another five minutes.
Takeaway #1: we have lifted our 12-month forward S&P 500 price target to 7,900, which represents a 7.7% gain from the May 7th close.
• In adjusting our forecast, we are focusing on our valuation/EPS model, which gives us the best way to bake in a two-speed economy and earnings backdrop.
• My apologies, but I’m going to have to go through some math.
• For our P/E calculation – we bake in macro assumptions for 1Q27 that are more onerous than consensus – 3.3% CPI and 4.5% 10-year yields; this takes the implied trailing P/E down a bit from the highs of the past year to around 24x.
• Meanwhile, for earnings – we take the bottom up consensus, trailing 4Q, for 1Q27, and lower it by 5%, taking the expected growth rate yr/yr down from 18% to 12%.
o How did we get to that 5%? We took the S&P 500’s consensus net income forecast, dividing it into an AI basket and ex AI basket.
o We left the consensus forecast for the AI basket unchanged – the forecasted growth rate of that cohort is 28% by the way, the fast lane in our two speed earnings back drop.
o For the S&P 500 ex that AI basket, which we think is more at risk from Middle East impacts, we took the consensus forecast for 1Q27 and lowered it by 7.5%. That’s the slow lane, as our adjusted forecast is anticipated growth of 6% in that cohort.
, which we round to:
• We do see some upside risk to our view – the median and average of the five models we normally use to set the target is around 8,100
o The median output comes from our sentiment model based on AAII net bulls. Net bulls have been rebounding, but are still a little below average. When net bulls are between average and one standard deviation below average, the S&P 500 typically moves up 10.8% over the next 12 months.
o Two of our other models are looking for even higher returns in the 13-14% range.
• Note that we don’t think the path will be linear, and that pullbacks are likely – that’s a nuanced view, not a bearish one, as we continue to have one of the higher price targets on the Street.
• But as long as recession fears are held at bay, we expected pullbacks to be no worse than 5-10%.
Moving on to Takeaway #2: on bigger picture positioning…
• We continue to prefer Growth over Value, US over non-US, and like Small Caps (but not as much as Large Cap Growth).
o On style, we think performance will chase earnings, and see stronger earnings growth forecasts and rates of upward revisions in big cap Growth, Mag 7, and AI related stocks.
o On US-non-US, relative valuations have bene on the rise, but don’t look alarming for the US yet.
o On Small Caps, we’re keeping a close eye on valuations, but think positioning looks favorable.
• On sectors, our views are mostly unchanged, but we have lowered Health Care to market weight from overweight.
• Valuations remain attractive, in our view, but earnings revisions trends are weak, flows are negative, and the sector was middle of the pack on most of the questions in our April analyst outlook survey for the US
And wrapping up with Takeaway #3: recapping 1Q26 earnings.
• There’s one particular stat to highlight - on the expected EPS growth rate – 1Q26 started out with a 13% consensus forecast and is now tracking at 26%.
• Other quarters in:
• When we look at recent changes in anticipated 2026 EPS growth rates as a whole, Tech, Energy, and Materials are the ones that have seen big upward revisions and also have higher anticipated growth rates than the S&P 500.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
