Risk of a deeper S&P 500 correction into the 4,900-5,300 range has risen: RBC

Investing.com -- RBC Capital Markets sees an increasing risk of a deeper correction in the S&P 500, with the potential for a drawdown into the 4,900-5,300 range.

While the investment bank has not changed its year-end price target of 6,600, it warns that downside risks have risen amid changing economic conditions and investor sentiment.

“The risk of a deeper, growth scare drawdown (a peak to trough decline of 14-20% into the 4,900-5,300 range, similar to the biggest drawdowns of the post-GFC/pre-COVID era) and the need to pivot from our base case to our bear case have risen,” said Lori Calvasina, head of U.S. equity strategy research at RBC.

The market’s recent weakness comes as investors assess growing uncertainty around U.S. economic policy. While tariffs have dominated recent discussions, Calvasina notes that the broader impact of Washington’s policy shifts—including spending cuts and regulatory changes—is creating additional headwinds.

“Investor, consumer, and corporate vibes have all weakened or been dented to varying degrees, and reasons to be concerned about the labor market are starting to show up in surveys and other data sets,” the strategists said in a Thursday note.

Calvasina remains cautious about the near-term outlook, citing a lack of clarity on how current sentiment shifts will translate into hard economic data.

“For stocks to bottom, we think clear evidence of resiliency in the hard data needs to emerge, and/or more clear indications of a bottoming in our sentiment, valuation, and earnings revisions indicators,” she continued.

Despite these concerns, RBC has not revised its S&P 500 year-end base case target of 6,600, which it believes can accommodate a temporary 10% pullback to around 5,500.

However, should economic conditions worsen and sentiment deteriorate further, Calvasina suggests that it may pivot to its more cautious 5,775 year-end bear-case scenario.

Calvasina also highlights potential stabilization factors. Investors remain focused on Federal Reserve policy, with expectations that additional rate cuts could provide some support to equities. Still, risks related to inflation and labor market pressures could complicate the Fed’s decision-making process.

In the meantime, RBC remains in a “discovery process,” as volatility is likely to persist until clearer signals emerge regarding the resilience of economic fundamentals.