3 reasons why S&P 500 may drop up to 10% in the near term: RBC

RBC Capital Markets has adopted a more guarded stance on U.S. equities over the coming months, cautioning in a Wednesday note that the S&P 500 might retreat by up to 10% despite maintaining a positive longer-term forecast.

Lori Calvasina, head of U.S. equity strategy, stated that the likelihood of a standard pullback in the 5-10% range has increased as autumn begins, citing multiple contributing elements.

Seasonality ranks first, as September has delivered losses for the S&P 500 in five of the last ten years.

The second factor involves U.S. midterm elections, which have typically fueled volatility during the latter half of those years. RBC additionally observed that opposition to artificial intelligence has become a campaign topic, while wagering markets show rising odds of a Democratic sweep—a scenario the firm's research associates with weaker market performance.

Third is the ongoing Iran conflict, which Calvasina noted has depressed consumer confidence.

She added that persistent worries about inflation, Federal Reserve policy and interest rates present an additional obstacle, observing that small-cap shares have lagged since late June amid growing expectations of rate increases.

Despite this short-term wariness, Calvasina reaffirmed RBC's 12-month S&P 500 objective of 8,150, roughly 6% higher than the September 8 closing level.

“We still see numerous reasons for optimism,” Calvasina wrote, noting that each of the five models used by the firm to arrive at its target indicates advances over the next year.