RBC raises S&P 500 forecast, sees the market gaining another 3% from here

Published Tue, May 4 20218:29 AM EDT

The stock market has a bit more room to run in 2021 after a robust start to the year, according to RBC Capital Markets, which on Tuesday hiked its forecast for the S & P 500. Lori Calvasina, the bank's head of U.S. equity strategy, wrote in a note to clients that she now sees the market index finishing the year at 4,325, up from her prior target of 4,100. The new projection implies about 3% upside from where the S & P 500 ended April. The strategist explained that the increase to the price target comes thanks to the Federal Reserve's plans to continue buying vast amount of Treasury bonds and asset-backed securities over the next several months. The S & P 500 is up 11.6% so far this year. "We are now anticipating a full year gain of 15%," she wrote. "Our new price target now accounts for some slight multiple expansion commensurate with the modest expansion we are seeing in the Fed's balance sheet." The central bank has for much the past year embarked on a massive campaign using its emergency powers to keep markets liquid during the Covid-19 pandemic. Critically it's cut its benchmark short-term borrowing rate to near zero and bought nearly $4 trillion worth of bonds, pushing its balance sheet to just shy of $8 trillion. It's that massive influx of cash and easy monetary policy, Calvasina wrote, that should support market prices through the end of the year. RBC also updated its S & P 500 earnings per share forecasts to $187 for 2021 and $200 for 2022, up from $177 and $193, respectively. The improved profit estimates bake in better margins and buybacks, along with an approximate 4% increase in the effective tax rate for the S & P 500 in 2022 due to expectations that the Biden White House will pass a corporate tax rate hike. "The signal that we are sending with these moves is that we see a little more room for stocks to climb higher this year, but that we also continue to expect a pullback or heightened volatility in the market before the year is done capping that upside," Calvasina added. RBC also offered clients its thoughts on how President Joe Biden's newly debuted American Families Plan could impact the various market sectors. The president in late April unveiled the $1.8 trillion plan, which would earmark hundreds of billions of dollars for high-quality child care, a national paid family and medical leave program and other education programs. Consumer staples and discretionary stock would benefit the most if the administration's plan passed as a result of direct investments in direct support to working families, including universal preschool and two years of free college, Calvasina wrote. Conversely, financials and real estate investment trusts could see headwinds stemming from an increase to the capital gains tax for households making over $1 million and added regulatory oversight on account flows. — CNBC's Michael Bloom contributed reporting.

Angela Weiss | AFP | Getty Images

The stock market has a bit more room to run in 2021 after a robust start to the year, according to RBC Capital Markets, which on Tuesday hiked its forecast for the S&P 500.

Lori Calvasina, the bank's head of U.S. equity strategy, wrote in a note to clients that she now sees the market index finishing the year at 4,325, up from her prior target of 4,100. The new projection implies about 3% upside from where the S&P 500 ended April.

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