In a recent note to clients, RBC Capital Markets' head of US equity strategy, Lori Calvasina, joined Bank of America's Savita Subramanian in projecting that the S&P 500 (^GSPC) will soar to a new milestone of 5,000 in the coming year. Calvasina's 2024 outlook, released on Wednesday, reflects a positive stance on US equities amid potential headwinds.

RBC Capital Markets anticipates a 10% uptick in the benchmark index from its current levels, with the projected target of 5,000. While acknowledging that some of the gains forecasted for 2024 may have been pulled forward during the recent market rally, Calvasina and her team maintain a constructive outlook for US equities in the upcoming year.

Calvasina highlighted in her outlook that certain factors could affect market sentiment, including a sluggish economy and uncertainty surrounding the 2024 Presidential election. However, RBC's valuation and sentiment analysis indicate positive signals, especially as earnings per share for the S&P 500 are projected to reach $232 in 2024.

One of the major concerns raised by market skeptics has been the elevated valuation of the S&P 500 in the post-COVID market. However, Calvasina argues that valuations can persist at higher levels as long as earnings continue to rise. This supports the belief that stocks can maintain their momentum even with higher valuations.

Market sentiment has proven to be a crucial indicator, with the closely monitored AAII Investor Sentiment Survey signaling negative sentiment before the fall sell-off and showing positive signs before the recent market upturn in November. RBC remains optimistic, stating that sentiment currently remains "constructive."

RBC's projections for the economy are grounded in consensus forecasts, which anticipate 1% GDP growth in 2024. According to RBC, this factor will likely favor growth stocks and continue to outshine value stocks in the year ahead. Calvasina suggests that for value stocks to lead sustainably, GDP growth forecasts for 2024 and 2025 would need to be revised substantially upward.

Furthermore, RBC has been highlighting opportunities in small-cap stocks for the past few months and predicts this trend will continue. The concern over the impact of higher interest rates on small caps has been deemed overstated by RBC, as the company believes that small caps have been oversold and sees it as an opportune time to increase exposure to this segment of the equity market.

Bonds have played a significant role in the stock market this year, with an increase in yields pressuring stocks between September and October. However, according to Calvasina's model, the S&P 500 is expected to rise by approximately 10% next year, while the 10-year Treasury yield is projected to decline from its current 4.4% to 3.74% by the end of 2024. The analysis suggests that stock prices will remain sensitive to yields in the year to come, but bonds may not necessarily derail the equity market returns.

As Wall Street strategists focus on the number 5,000, the projection of the S&P 500 reaching such a record high is met with optimism by RBC Capital Markets. With a positive outlook on US equities in 2024, RBC's projections point towards potential growth opportunities in various sectors while recognizing potential headwinds that investors should closely monitor.