RBC cut its S&P 500 target at year-end, citing a slowing economy. However, the Wall Street company has found a bright spot in the small-cap stocks, which are looking more attractive. The bank cut its 2022 S&P 500 price target to 4,700 from 4,860 previously, according to a note Monday from Lori Calvasina, RBC’s head of US equity strategy. The new forecast shows a 14% increase from Friday’s close of 4,108.54. “We are continuing to bake amid slower economic growth in 2022-2023 but not a recession,” Calvasina said. “We continue to see significant stabilization in the bottom-up consensus 2022 and 2023 EPS forecasts.” There are signs that the stock market may have found a bottom, said the strategist. The S&P 500 index briefly sank into bear market territory last month as aggressive tightening action by the Federal Reserve sparked recession fears. “Defense sector valuations are equally expensive as they tend to be relative to both Secular Growth sectors and Cyclic sectors,” says Calvasina. “The decline in the S&P 500 Consumer Discretionary and Communication Services sectors at their May 19 low across the broader market roughly equaled the average decline for these sectors over the past four years. recession related to the last recession in the US stock market.” A brighter outlook for small-cap companies? Meanwhile, RBC has elevated small-cap stocks to neutral from underweight, citing improved risk/reward as well as a better earnings picture. “Small Cap looks attractive or better given our positioning/sentiment, valuation, and earnings,” says Calvasina. “We’re still not ready to go back to being overweight as Small Cap still faces fundamental headwinds. … It’s also important to note that Small Caps are starting to look a little better than the Large Cap. in terms of income.” The benchmark Russell 2000 is up more than 1% this month, outperforming the S&P 500 and Nasdaq Composite. The small-cap index is still down more than 15% for the year.
