By Martin Baccardax

U.S. stocks are likely to perform solidly over the next 12 months, RBC Capital indicated Friday as it boosted its S&P 500 price target to one of the highest on Wall Street while highlighting a "two-speed economy and earnings backdrop" tied to the war with Iran.

Stocks have powered notably higher since the end of March, supported by the strongest quarterly earnings results in five years alongside hopes of a peaceful conclusion to the U.S. war with Iran. The S&P 500 has reached a series of record highs, and was up 12.4% on the quarter and 7.6% higher for the year.

Big Tech has led the gains, with an index of the Magnificent Seven giants rising nearly 25% from its late March low and the PHLX semiconductor benchmark surging more than 56% over the same time frame.

First-quarter earnings are on pace to rise close to 30% now that around 88% of the S&P 500 have reported, with bottom line results likely topping $680 billion. Just over half of that total, however, is down to three major sectors: communications services, information technology, and consumer discretionary.

RBC sees tech stocks, and a wider base of artificial intelligence firms beyond the Mag 7, supporting gains over the next year as the S&P 500 rises to 7900 points, a level that suggests an advance of around 7.7% from current levels. Upside risks could take the benchmark to 8100, the bank added, a 10.4% gain from Thursday's close.

"We've decided in our latest update, however, to link our price target to the model that is best equipped to bake in the idea of a two-speed economy and earnings backdrop," said Lori Calvasina, head of U.S. equity strategy. "AI in the fast lane, Middle East in the slow lane."

"We think the main risk to our 12-month view is that the situation in the Middle East ends up lasting much longer and/or the damage done is far greater than financial market participants and public companies expect, triggering a recession in the U.S.," she said. "But we see this scenario as a tail risk rather than the base case."

RBC said it doesn't expect gains over the next year to be linear, but sees any pullbacks holding in the region of a 5% to 10% downturn, unless the U.S. economy were to suddenly enter recession.

Those pullbacks could be tied to earnings revisions from the U.S.-Iran war, profit-taking in the semiconductor space, and the impact of midterm elections in November.

"Setbacks in the war are another obvious potential downside catalyst in the short term," Calvasina said. "We've tended to view private credit as more of a narrative problem than a fundamental one but are also keeping an eye on this corner of the market as well."

The bank likes growth stocks over value names heading into the next phase of the current bull market, with a bias for large-cap and U.S. stocks versus those overseas. Earnings revisions from the war suggest a greater hit to non-tech sectors, RBC noted.

"Data on earnings estimates points to eroding dominance for the Mag 7 relative to the rest of the S&P 500, since 2024 and in the years ahead, but we have not yet seen an outright shift in earnings leadership to the rest of the market," Calvasina noted, adding that this reinforces her view "which we believe has allowed the mega cap Growth/AI theme to fight back to maintain its leadership."

The bank's broader AI basket, meanwhile, is showing "a sharp pickup in anticipated growth dominance in 2026 which we think has helped to invigorate the AI theme even more in recent trading."

"Net income growth is expected by consensus to be stronger in the AI basket than the Mag 7 in both 2026 and 2027, which we think is also supportive of a broadening of leadership within the AI theme," she added.

Broader sector overweights include the tech-heavy communications services, which includes Alphabet and Meta Platforms, financials and materials, while market weighted sectors include consumer staples, information technology, and healthcare. The bank held the consumer discretionary sector at underweight.

Write to Martin Baccardax at martin.baccardax@barrons.com

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May 08, 2026 07:34 ET (11:34 GMT)

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