A pullback is brewing, say these strategists who have examined every drawdown since 1956

By Jules Rimmer

U.S. equity strategist highlights four main risks currently threatening stock markets

While RBC maintains its 12-month target for the S&P 500 at 8150, it thinks the journey there may prove less than straightforward

A stock-market pullback is brewing, according to strategists who have studied every retreat since 1956 for clues on the future.

A report published Monday by RBC Capital Markets predicts a 5% to 10% "garden variety" pullback in the S&P 500 over the coming weeks or months.

What might prompt this correction? Strategist Lori Calvasina and co-authors Rachel Sidari and Simon Simoski, cites four tactical risks currently posing a threat to markets: the war in Iran; the possibility that economists lower their top-down GDP forecasts, forcing equity analysts to trim earnings growth forecasts; volatility that may arise from any number of scenarios around the U.S. midterm elections; the recent trend for both higher bond yields and the Fed's signalling of a hawkish pivot.

Nonetheless, Calvasina and team still maintain their 12-month target on the S&P 500 SPX at 8150, which they describe as "higher but not heroic." Their central investment case is that stocks generally "grind" upwards but progress is unlikely to be linear. RBC maintains five different models for projecting S&P 500 returns but while four of them point to higher returns, one of them that factors in earnings per share and valuations is flagging concerns owing to the sharp move higher in U.S. 10-year BX:TMUBMUSD10Y bond yields towards 5.25%.

Calvasina, head of U.S. equity strategy, has explored all major stock market drawdowns of more than 10% since 1956 and observes that since the global financial crisis in 2008 that these drawdowns have become both less severe and shorter. The usual catalyst for the pullbacks that the RBC report highlights is an outright decline in corporate profits. The positive trend in U.S. earning revisions in 2026 has therefore been one explanation why major U.S. stock indices have been remarkably resilient so far, despite adverse moves in energy prices, inflation and bond markets.

Since the GFC in 2008, drawdowns have generally tended to be milder than before

RBC also detects that during major drawdowns, confidence and sentiment gauges move sharply with readings like the National Federation of Independent Business and the American Association of Individual Investors dropping sharply. However, in many of the drawdowns identified by RBC, the sudden slump in stocks was preceded by highly bullish investor sentiment, and this is nowhere apparent today.

Furthermore, RBC noticed that labor-market indicators tended to deteriorate during major drawdowns but again, since the global financial crisis, these signals have generally been less susceptible to weakness. Jobs growth has been relatively buoyant recently with a strong payrolls release for August.

Evidence of damage to the broader economy also tends to emerge during these periods of volatility but again, RBC finds this kind of data largely absent of late. Investors might also derive some reassurance from the weak seasonality in August and September returns shown in five of the last ten years.

Also, while higher bond yields can portend a correction in stocks, Calvasina points out that in the last four years, the S&P fell 5% to 10% in two of the three periods of rising yields but actually gained in the other. For her, real yields may prove a better guide to market direction, and while they have broken through post-2022 highs in September, a decline here could help to stabilize the S&P 500.

In terms of sectoral exposure, RBC maintains an overweight call on tech XLK, financials XLF and materials XLB while disfavoring utilities XLU.

-Jules Rimmer

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09-28-26 0702ET