Everything in Moderation

The big things you need to know:

• First, we think the recent pick up in 10-year yields raises the risk of a tier 1 (5-10%) pullback in the S&P 500 in the short-term, but does not alter our longer-term constructive view on the S&P 500.
• Second, it was business as usual at the RBC Health Care conference last week in terms of company commentary.
• Third, other things that jump out from our latest updates include a move up in the median NTM P/E for the biggest market cap names in the S&P 500 (which also adds to risk of a near-term pullback).

Welcome to RBC’s Markets in Motion podcast, recorded May 27, 2026. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

The big things you need to know: First, we think the recent pick up in 10-year yields raises the risk of a tier 1 (5-10%) pullback in the S&P 500 in the short-term, but does not alter our longer-term constructive view on the S&P 500 or our 7,900 12-month price target. Second, it was business as usual at the RBC Health Care conference last week in terms of company commentary. Third, other things that jump out from our latest updates include a move up in the median NTM P/E for the biggest market cap names in the S&P 500 (which also adds to risk of a near-term pullback).

If you’d like to hear more, here’s another 7 minutes.

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Now, back to regular programming.

Starting with Takeaway #1: Bond Yield Blues

• Our general view is that the recent rise in interest rates – if it continues – adds to the risk of (but does not guarantee) a near-term, tier 1 pullback in the S&P 500 of 5-10%. However, for now it does not alter our longer-term view or our 12-month S&P 500 price target of 7,900.

• We spent some time last week going back to basics and studying the relationship between the S&P 500 and 10-year yields since 2022. We picked the end of 2022 as a starting point since, after a major step up in late 2021 and 2022, 10-year yields have been relatively contained within a band of roughly 3.3-5%, with higher lows progressively being made.

• In late 2023 and early 2024, there were pullbacks in the S&P 500 that aligned fairly well with the moves up in 10-year yields in terms of timing. They totaled roughly 10% and 5% with increases in yields of 168 basis points and 91 basis points – far less than late 2021-2022’s increase of more than 300.

• In late 2024, the S&P 500 continued to rise despite another noteworthy upswing in bond yields, with stocks powered by animal spirits around the 2024 Presidential election. The mood of the market admittedly seems different today, but to the extent there’s a pullback driven by interest rate increases, the recent history suggests that as long as we generally stay within this post 2022 range, a pullback should be limited to the 5-10% range.

• We have spent a lot of time over the past week discussing the assumptions in our valuation and EPS model that support our 7,900 12-month S&P 500 price target (a 6.1% increase from the 5/21/26 close, higher but not heroic). We bake in a P/E derived from macro assumptions of 3.3% on CPI, a flat Fed, and 4.5% 10-year yields for 1Q27, alongside an EPS assumption that trims the bottom-up consensus by 5%.

• We’ve also spent a fair amount of time reviewing our stress test that keeps the same EPS but takes CPI up to 3.8%, adds in two hikes, and lifts 10-year yields to 5%. That math puts the S&P 500 in the 7400-7500 range, close to where it’s been stuck lately.

• We’ve now added a new stress test that takes CPI up to 4.2%, adds in four hikes, and takes 10-year yields up to 5.5%. Using (once again) the same EPS assumption, that math points to fair value in in 7,000-7,100 range – reinforcing the idea that a breakout too far above the post 2022 range on the 10-year yield (in tandem with other stressors) would likely be harder for stocks to digest pointing to a down market.

We can arrive at much more bearish outcomes if we take down the earnings numbers significantly more on any of these P/E scenarios. Overall, this exercise is most important as a reminder that the S&P 500 is currently caught between a stiff headwind (P/E compression from rising rates and inflation) and a strong tailwind (EPS growth, primarily due to the strength of the AI theme plus a bit of resiliency from other companies). Where the stock market ends up a year from now will be a function of the intensity of both of these variables, not just the direction of one or the other.

Looking a little more closely at Fed dynamics, it’s worth noting that, historically, the S&P 500 has had a similar return during 12-month periods which see modest cuts (13.3% on average, when cuts are 100 basis points or less) and those which see modest hikes (13.7% on average, when hikes are 100 basis points or less).

In the short-term, however, it has been clear to us that in recent years sentiment around hikes and cuts, what’s being baked in by financial market participants, does often matter to the immediate direction of S&P 500. But what’s being priced about today’s future and what was getting baked in back in 2022 are simply not in the same realm.

Overall, we think what’s been happening with interest rates and Fed views has added to the risk of a short-term pullback in the S&P 500 of the tier 1 (5-10%) variety But we don’t feel compelled to change our view that the earnings tailwind will be a bit stronger than the P/E compression headwind in the year ahead, allowing stocks to grind higher. The subtitle of this podcast – “Everything in Moderation” – is designed to capture the idea that the S&P 500 can handle a bit of pressure from the interest rate arena, though not an infinite amount.

All that being said, we are reducing our enthusiasm for Small Caps a notch. Since 2022, we have tended to see Small Caps lag when Fed views get less dovish/more hawkish. We’ve also tended to see Small lag Large or be rangebound relative to Large Cap since 2022 when 10-year yields are moving up. We are not negative, as fundamentals are generally solid. We are simply a little less enthusiastic due to interest rate dynamics.

Moving on to Takeaway #2 – which we’ll do quickly. What we learned at RBC’s Health Care conference last week.

• It was business as usual in terms of company commentary.

• Discussion of the Middle East was low (which speaks to the sector’s resiliency on that issue), as we really only heard one company spend time on how the event was impacting them.

• Though there were a few exceptions, the overall tone was confident,

• AI color was helpful in understanding use cases.

• From the policy outlook panel, we also came away with the sense that policy risk for the sector has been reduced – with lower legislative risk in particularly going forward, but lingering risk from executive actions. Hospitals were seen as the biggest industry winner from the midterms in a Democratic sweep or Democratic House flip scenario.

And wrapping up with Takeaway #3 – one of the other key things that jumped out in our work last week in terms of valuation.

• We’ve been keeping a close eye on S&P 500 and Russell 2000 bottom-up forward P/E’s for signs of short-term overheating in the broader US equity market. In recent weeks, NTM P/E’s were at or close to recent highs in both indices, but we didn’t see the same pressure points in place on FY2 P/E’s.

• One thing we noticed in our latest batch of updates is that the median NTM P/E for the top 10 market cap names in the S&P 500 has gotten up to almost 31x. Post COVID, this indicator has tended to top out around 32-33x. While we’ve taken some comfort in the fact that the FY2 P/E charts have suggested the stock market has a bit more room to run, along with the NTM P/E charts, the top 10 chart suggests to us that risks of a sort-term, tier 1 pullback have grown.

• Note the median NTM P/E for the rest of the index ex the top 10 names has been compressing and is nearly back to average, which also raises the possibility that the mega cap growth trade is due for a bit of a pause.

That’s all for now. Thanks for listening. And don’t forget to vote!