(Bloomberg) -- Better earnings expectations, low layoffs and recovering corporate confidence have prompted RBC Capital Markets to lift its S&P 500 Index year-end price target to 4,250, up from its previous call of 4,100.
“While our new target still reflects a fairly neutral view on the direction of stocks through year end, when asked we do acknowledge more upside risks than downside risks,” head of US equity strategy Lori Calvasina said in a note to clients Tuesday. “We’ve also been struck by how many bearish leaning investors have been asking us to walk them through the bull case and explain why stocks have been so resilient.”
Prospects for an imminent debt-ceiling resolution and euphoria over artificial intelligence have catalyzed a recent equity rally, lifting the S&P 500 above the long-awaited 4,200 level. The US equity benchmark is now up more than 10% year-to-date.
The firm attributed its higher 2023 outlook to a recovery in earnings sentiment and labor market resilience — particularly in key areas like industrials — that has maintained hopes that the US economy may avert a recession.
“Global investors may have been too pessimistic on the US economy,” Calvasina wrote.
Among other factors cited by RBC for its improved target are changes to its modeling that include a switch to a more constructive election cycle test than the prior political test used in its forecasting, and extreme levels of investor bearishness that typically precede solid US equity returns.
RBC also boosted its S&P 500 earnings-per-share forecast to $213 from $200, citing better-than-expected margins reported in first-quarter earnings results, and introduced a preliminary 2024 EPS target of $223.
The rosier prediction comes weeks after Calvasina told Bloomberg Television that she was sticking with her 4,100 target as macroeconomic risks remain.
RBC joins other Wall Street peers in rethinking their gloomy outlook for US equities after two straight quarters of positive returns. Last week, Bank of America Corp. lifted its 2023 S&P 500 target to 4,300 from 4,000, and strategists at Citigroup Inc. raised US stocks to neutral and technology shares to overweight.
Despite an improved outlook, RBC warned that the large-cap stock rally that’s been driving the market higher is due for a pause and said small caps present “an attractive entry point for patient investors.”
“We suspect large cap growth leadership will take a breather before the year is up, but think the move has been deserved and may not be over just yet,” wrote Calvasina, adding RBC is overweight tech. “We’d stick with the best of the growth trade but would also diversify by selectively adding exposure to value (our favorite value sector is energy).”
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