TLDR
- RBC Capital Markets warns the S&P 500 could pull back 5-10% in the near term
- September seasonality, midterm elections, and the Iran war are the three main risks
- U.S. and Iran military strikes pushed Brent crude briefly above $100 a barrel
- Treasury yields rose to 4.8% as inflation fears mount ahead of Friday’s CPI report
- RBC still holds a 12-month S&P 500 target of 8,150, about 6% above recent levels
RBC Capital Markets has raised a caution flag on U.S. stocks in the near term, warning that the S&P 500 could fall as much as 10% even as the bank keeps a positive 12-month outlook.
Lori Calvasina, head of U.S. equity strategy at RBC, said risks of a “garden variety pullback of 5-10% have grown” as the fall season gets underway.
She pointed to three specific reasons for the caution.
Seasonality, Elections, and War
The first is seasonality. September has been a down month for the S&P 500 in five of the last 10 years.
The second is the U.S. midterm elections. RBC noted that midterm years have historically brought stock market volatility in the second half. The bank also flagged that AI has become a campaign issue, and that betting markets are pointing toward a Democratic sweep, which RBC’s research suggests would be less friendly to markets.
The third risk is the ongoing Iran conflict. Calvasina said the war has weighed on consumer sentiment.
Stock futures fell Wednesday morning after reports that the U.S. military destroyed five Iranian tankers. The news pushed Brent crude above $100 a barrel briefly, its highest level since July.
Dow Jones Industrial Average futures fell 152 points, or 0.3%. S&P 500 futures dropped 0.2% and Nasdaq 100 futures also fell 0.2%.
The three major indexes had already slid the previous session over rising oil prices. Higher energy costs are adding to concerns about inflation.
Inflation and Rate Fears Add Pressure
The yield on the 10-year Treasury note ticked up to 4.8% on Wednesday. Rising yields reflect expectations that interest rates may stay higher for longer.
Deutsche Bank analyst Jim Reid noted that rising energy prices are dampening risk appetite across asset classes.
Inflation is in sharp focus ahead of Friday’s consumer price index report for August.
Small-cap stocks have underperformed since late June as expectations for further rate hikes have grown, Calvasina added.
Not everything was lower. Artificial intelligence stocks caught a bid despite the broader pressure. Chip maker Qualcomm and memory supplier Sandisk were both rising before the opening bell.
Apple’s annual product event was also scheduled for Wednesday, where the company is expected to unveil a foldable iPhone.
Despite the near-term concerns, RBC maintained its 12-month S&P 500 price target of 8,150. That is roughly 6% above where the index closed on September 8.
Calvasina said all five of the models the firm uses to set its target still point to gains over the next year.
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