If you’d like to hear more, here’s another five minutes.
: Updating Our YE:
• 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?
o It’s midway between the median and average of the five different models we’re using right now.
viously we were baking in the:
o 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.
o 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.
o 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%)...
o 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).
o 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.
o The other bullish model is our sentiment model – which looks at AAII net bulls and 6 month forward returns off current levels.
o Both of those models point to a 2nd half gain in the mid to high 4% range.
ing a bit overvalued to us on:
• 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.
ere’s Been No Change to Our:
• 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.
forecast for:
• 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.
o 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.
ay end up getting pushed into:
Wrapping up with takeaway #3: new worries.
ppears to be fading – since:
• 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.
