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RBC slashes S&P 500 call, but loves stocks (huh?)

Markets want 'normalized rates': Pro
Markets want 'normalized rates': Pro

Jonathan Golub and the rest of his strategy team at RBC Capital Markets acknowledge they were way too optimistic about the stock market's prospects in 2015.

But don't call Golub a bear: He still thinks equities are heading higher, just not at the rapid pace he had originally expected.

RBC in a note to clients Monday cut its full-year outlook for the from 2,325 to 2,100. The old number would require a 22 percent or so surge in the next three months that would appear to be borderline delusional considering the ongoing heightened level of volatility. That forecast was a more modest 13 percent upside expectation from back where the index started 2015.

At 2,100, the target still is an expectation for a 10 percent move higher — again, a lofty expectation considering the market's current downside momentum, but more reachable than 2,325. Multiple other Wall Street firms were earlier in lowering their expectations; Piper Jaffray, for instance, in late August slashed its 2,350 call all the way down to 2,135.

Trader on the floor of the New York Stock Exchange.
Getty Images

"You say, 'All right, the market's moved sufficiently away from my initial numbers. I still think the thing is going to be on track, but you've got to reflect reality," Gollub said in a phone interview. "Sometimes you've just got to look around."

Read MoreFed just threw kerosene on the fire: RBC strategist

Golub cites a number of assumptions for his bullishness: That recent volatility represents a spike but not a new normal; that earnings, which have been flat this year due primarily to a plunge in energy, will resume; and that the Federal Reserve will cease to be so disruptive once the U.S. central bank stops making investors guess about its next move.

Just a few days ago, Golub had complained on CNBC about the Fed's mixed signals, with its decision this month to forgo a rate increasing followed up by hawkish talk from Fed officials, including Chair Janet Yellen.

"Our longer‐term outlook for market trends remains largely intact," he said in his client note. "We believe the market will deliver ~10 percent annually for the next several years."

In all, though, it's a challenging environment.

Read More Fed's window for 2015 rate hike is closing quickly

The S&P 500 slipped back into correction territory Monday morning and was down 7.5 percent for the year following the day's aggressive selling. Third-quarter earnings season, which starts in earnest the week of Oct. 12, is expected to show a drop of more than 4 percent, making it a difficult backdrop for a profit-driven rally. Revenue has been poor as well, with top-line growth expected to decline 2.3 percent for the full-year period, according to S&P Capital IQ.

Golub, though, believes a return to normalization will begin and companies will resume aggressive share buybacks, which have underpinned market growth as earnings stumbled. Buybacks in the second quarter fell 8.7 percent from the first three months of 2015 but remained up 13.2 percent from the year-ago period, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

"Our constructive outlook on the market remains intact," Golub said. "Revenue growth should come in more positively (but still weak) in the year ahead. In this low top-line environment, margins/buybacks should continue to contribute to solid earnings results. Additionally, valuations should rise as equities appear favorable versus corporate bonds, alternatives abroad, and the cost of capital."

Just three of the 10 S&P 500 sectors were out of correction territory Monday, with consumer discretionary the only positive sector for 2015 as a whole.