Earnings and a supportive economic backdrop should help stocks, says RBC.

Hopes that the war with Iran will officially end soon and revived excitement over AI-related stocks have helped the S&P 500 register another record high this week.

But arguably the biggest driver of the latest rally is a better-than-expected first-quarter corporate earnings season. It's the prospect of improving company profits - along with a supportive economic backdrop - that has led RBC Capital Markets on Friday to hike its 12-month S&P 500 target to 7,900 from 7,750.

That puts RBC toward the top of Wall Street S&P 500 SPX targets, though comparisons are tricky because most other analysts are looking at the end of 2026. Deutsche Bank's year-end target currently tops the charts at 8,000.

The RBC team, led by Lori Calvasina, head of U.S. equity strategy, explains that "the implied fair value level for the S&P 500 from our valuation/earnings per share test has improved due to the improvements in bottom-up consensus [earnings] forecasts for the next four quarters."

Despite its optimism, the RBC team highlights what it's calling "tactical risks" that need monitoring.

"We are keeping an eye on valuation levels in the S&P 500 and Russell 2000, which could indicate a return of short-term overbought conditions when they return to past highs, but aren't seeing that condition in place broadly yet," the team says.

One possible cause of a pullback later this year could be if the war in the Middle East war causes downward adjustments to late 2026 or 2027 earnings-per-share outlooks.

Profit taking in semiconductor stocks SOX, "which have been an important pillar of the recent move in the S&P 500 and have strong earnings revisions trends but look pricey," is another risk flagged.

Then there's the political backdrop. The U.S. midterm elections historically tend to dampen stock-market optimism, as was seen in 2018 and 2022, RBC notes. Indeed, the bank reckons that the 9.1% drawdown in the S&P 500 in the first quarter of this year was partly because prediction markets saw an increased chance of a Democratic clean sweep.

However, "anticipation of a split Congress has been on the rise again in betting markets (a possible tailwind to U.S. equities of late) even though it is not yet the most expected outcome," the RBC team adds.

Two more possible stumbling blocks for stocks are a continuation of the Iran war and a flare-up in private-credit concerns, though, regarding the latter, RBC views it as "more of a narrative problem than a fundamental one."

In terms of where investors should be positioned, RBC has a bias in favor of growth stocks over value within the large-cap cohort.

"When we look at earnings sentiment, the rate of upward EPS estimate revisions has been stronger for growth broadly and the biggest market cap names in the S&P 500 in particular than value and the rest of the market," RBC says. Furthermore, "impacts from the Middle East conflict seem likely to be more of a headwind for earnings revisions for value and the rest of the market going forward."

The team there also agrees with the market consensus that net-income growth may be stronger in the AI basket than the "Magnificent Seven" megacap tech stocks in both 2026 and 2027, and that should support a broadening of leadership within the AI theme.