RBC sees S&P 500 rallying 11% through end of 2025

Investing.com -- RBC Capital Markets on Monday introduced its initial year-end 2025 S&P 500 price target of 6,600, implying an upside potential of 10.6% from the index’s closing price of 5,969 on November 22.

The firm outlined a base case range of 6,200 to 6,700 for the stock market index, suggesting that another year of solid economic and earnings growth, political tailwinds, and additional relief on inflation could sustain the market's upward trajectory.

“The story the data tells us is that another year of solid economic and earnings growth, some political tailwinds, and some additional relief on inflation can keep stocks moving higher in the year ahead,” RBC said in a note.

The investment bank’s 2025 price target accounts for an anticipated 5-10% drawdown in the S&P 500, driven by concerns over elevated market positioning, recent sentiment froth, and stretched valuations for 2024.

These factors, RBC noted, “leave the S&P 500 vulnerable to bad news and perhaps simply in need of a breather.”

“The sudden move higher in 10-year yields, the dialing down of Fed cut expectations, and the recent surge in the US dollar all pose challenges for the US equity market,” it added.

Seasonally, the stock market tends to perform strong in November-December followed by potential weakness in January-February.

But the outlook for 2025 is not without uncertainties, as some of RBC's models are approaching levels that historically signal caution for stock direction. In a bear scenario, the S&P 500 could end 2025 at approximately 5,775, factoring in a less optimistic GDP outlook, higher inflation, no further Fed rate cuts, and 10-year yields finishing at 5%.

In terms of valuation, RBC's models, which incorporate consensus forecasts for personal consumption expenditures (PCE), 10-year yields, and Federal Funds rates, suggest that the market's price-to-earnings (P/E) ratios have been higher than many investors expected.

The firm's house view projects a year-end trailing P/E of 22.7x, based on an S&P 500 level of 6,161 and an earnings per share (EPS) forecast of $271 for 2025. The target of 6,600 implies a P/E of 24.2x at year-end 2025, which is not a major concern for RBC due to the model's inherent limitations and the recent trend of actual P/Es outpacing the model.

“Our 2025 target basically keeps the multiple flat with where it is today,” the firm explained.

Source: Investing.com