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Royal Bank of Canada has become the second major bank in less than a week to raise its year-end target for the S&P 500, as the blockbuster first-quarter earnings season continues to roll out.

RBC follows Credit Suisse , which bumped up its target on April 30. Even Citigroup , one of the most bearish of the big Wall Street banks, is sounding a little more optimistic about where the benchmark U.S. index may be heading later this year.

Lori Calvasina, head of U.S. equity strategy for RBC Capital Markets, on Tuesday lifted her 2021 S&P 500 target to 4,325, up from the 4,100 prediction she issued in January. That came alongside her S&P 500 earnings per share forecasts rising to US$187 for 2021 and US$200 for 2022 (up from US$177 and US$193, respectively).

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The S&P 500 closed Tuesday down 0.7 per cent to 4,164.66.

The index has still returned nearly 11 per cent this year, with tech-filled growth and cyclical-oriented value stocks frequently exchanging positions as market leaders in recent weeks.

With more than half of S&P 500 companies having reported first-quarter results, it has become clear that analysts have underestimated the earnings momentum coming into this spring. According to IBES data from Refinitiv, profits are now seen rising an average of 47 per cent in the first quarter, compared with forecasts of 24-per-cent growth at the start of April. About 87 per cent of the companies that have reported had earnings per share exceeding analysts’ estimates.

Ms. Calvasina cautioned that her modestly more rosy outlook for U.S. stocks doesn’t mean investors shouldn’t be prepared for a pullback.

“The signal that we are sending with these moves is that we see a little more room for stocks to climb higher this year, but that we also continue to expect a pullback or heightened volatility in the market before the year is done capping that upside,” she said in a note.

Her new S&P 500 target is not only based on what stocks are likely to trade at given higher earnings growth, but also the modest expansion being seen in the U.S. Federal Reserve’s balance sheet. The new EPS forecasts also bake in better profit margins and share buybacks than its previous forecasts and the effect, in 2022, of an expected moderate boost in the U.S. corporate tax rate.

Last week, Credit Suisse analyst Jonathan Golub raised his price target to 4,600 from 4,300 to reflect higher EPS estimates for 2021 and 2022. He pegged the move in part to expected robust growth in U.S. gross domestic product this year, which will boost corporate revenues and margins.

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Citi’s top strategist, Tobias Levkovich, remains decidedly more cautious on where stock prices will head next, expecting stocks to end lower than current levels. Yet, in a note on April 30, he cited “a variety of upside risks,” which include significant fund flows into stocks, more impressive earnings and additional monetary stimulus. “Admittedly, first quarter 2021 results may force our year-end S&P 500 objective closer to the upper end of our 3,600-4,000 trading range,” he said.

Mr. Levkovich’s more downbeat view stems from the current uber-bullish state of investors – a contrarian signal that suggests the good times won’t last. Citi’s Panic/Euphoria model, which incorporates a number of market data including margin debt and short interest, is showing clearly worrisome signals.

“Historically, it has been challenging to simply chase the tape when sentiment was this ebullient. If we found skepticism to be predominant, we would think very differently about our price target. Most [investors] are pushing us to raise our outlook even if they intellectually agree with our concerns – there may be talk of worry, yet positioning looks to be embracing risk,” Mr. Levkovich said.

He’s also concerned that inflation could prove to be “stickier” than many strategists anticipate.

For RBC’s Ms. Calvasina, there’s still reason to believe the S&P 500 has upside despite the overwhelmingly bullish state among investors. She pointed to a strong economic backdrop, high levels of corporate confidence, and “ample” monetary and fiscal stimulus.

“But we also continue to view euphoric investor sentiment/positioning, the peak in the growth rate of S&P 500 EPS that’s likely under way at the moment, and uncertainty over tax policy as an overhang on stocks in the months ahead.”

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