S&P 500 Could Sink 8% Without Fed Cut: RBC

Investors remain too optimistic about the timing of a Federal Reserve interest-rate cut, according to RBC Capital Markets strategists, who see the risk of an 8% slump in U.S. stocks if easing fails to materialize this year.

The team led by Lori Calvasina laid out three year-end scenarios for the S&P 500 Index based on expected corporate earnings, and the outlook for inflation and interest rates.

The benchmark index could drop to 4,900 points if the Fed holds rates at current levels, inflation proves stickier than expected and the 10-year Treasury yield remains below 5%, the strategists wrote in a note.

They also see corporate earnings rising less than the average analysts’ forecast.

If the central bank were to cut rates as expected, but earnings came in below projections, the S&P 500 would trade around 5,100 points — about 5% lower than current levels, Calvasina said.

And the third — bearish — scenario sees the benchmark slumping almost 16% if stubborn inflation results in Fed rate hikes.