Investing.com -- RBC Capital has set a 12-month S&P 500 price target of 7,900, implying roughly 7.7% upside from early May levels, while cautioning that near-term pullbacks could emerge even as the firm maintains a broadly constructive outlook.

Lori Calvasina, RBC Capital's head of U.S. equity strategy, said the firm does not expect the index's move higher to be linear, but anticipates that any pullbacks would amount to no worse than "a tier 1 garden-variety pullback in the 5-10% range."

A deeper 14% to 20% drawdown is seen as unlikely unless recession concerns return.

The price target is anchored to a model designed to capture what RBC Capital called "AI in the fast lane, Middle East in the slow lane," a two-speed earnings and economic backdrop.

The model trims first-quarter 2027 bottom-up consensus earnings per share by 5%, assuming 28% growth for AI-focused stocks and 6% for the rest of the index, combined with 3.3% consumer price inflation, a flat Federal Reserve and 10-year yields of 4.5%.

If inflation rises to 3.8%, the Fed hikes and yields push to 5%, RBC Capital said its fair value estimate would fall to the 7,400 to 7,500 range.

Potential near-term catalysts for a pullback include downward revisions to late-2026 or 2027 earnings estimates tied to war impacts, profit-taking in semiconductors, midterm election uncertainty and higher interest rates, which RBC Capital said tend to weigh on stocks primarily through multiple compression rather than earnings pressure.

The firm maintained a preference for Growth over Value and U.S. equities over international peers.