Investing.com -- U.S. equity market valuations are rising but have not reached levels that historically signal a ceiling, according to RBC Capital, which remains constructive on stocks in the year ahead.

The bank’s head of U.S. equity strategy, Lori Calvasina, stated in a note to clients that with the S&P 500 closing more than 14% above its March 30 low, valuation levels have been climbing but still have room to run.

“The bottom-up market cap weighted S&P 500 NTM P/E is trading a bit above 25x, still well below its high of more than 28x seen last year,” wrote Calvasina.

Meanwhile, the Russell 2000 is trading around 16.6 times fiscal year 2 earnings, below the 18-times-plus level that marked its earlier peak this year.

RBC maintained its 12-month-forward S&P 500 price target of 7,750, though Calvasina acknowledged the path is unlikely to be linear.

Potential sources of volatility include downward EPS estimate revisions for non-AI names, the midterm elections and profit-taking in semiconductors and AI stocks.

On the earnings front, RBC noted that first-quarter results continued to reflect resilience with a dose of caution, as companies emphasized buffers including hedging, inventory management and pricing power to offset war-related cost pressures. Consumer challenges were most visible in restaurants and travel.

"We think the emphasis that US public companies have made on their ability to manage through is one of the reasons the US equity market has been resilient since the war began," Calvasina wrote.

RBC added that any further pullbacks are expected to remain in the 5% to 10% range, with deeper drawdowns historically requiring serious recession fears.