The S&P 500 will jump another 8% - but looming risks could spark a sudden pullback, RBC says

• RBC Capital expects the S&P 500 to climb 8% to 4,100 through 2021 as the US economy rebounds.
• The benchmark will reach new records despite a brief stumble that's likely to arrive in the first half of the year, the firm's analysts said.
• Market leadership will continue to shift from large-caps and growth stocks to value and cyclical names, they added.
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The S&P 5oo will end the year at record highs, but the rally won't be without its hiccups, RBC Capital said Wednesday.

Strategists led by Lori Calvasina set their 2021 target for the benchmark index at 4,100, implying a 7.9% climb from the S&P 500's Tuesday closing level. Earnings are expected to rebound by 23% in 2021 and another 8% in 2022 as the US recovers from the coronavirus pandemic and its economic fallout.

The firm's bull case sees the S&P 500 leaping to 4,600 by the end of the year, about 21.1% higher from its last close.

But such highs will likely only come after a brief stumble, according to the team. RBC expects a "period of consolidation" to drag on US equities before the market stages its next climb, with the dip likely arriving in the first half of the year.

"It could be as mild as a mid-single-digit decline from the recent highs (taking the S&P 500 to about 3,600) or as deep as a drop in the mid-teens (about 3,200)," RBC's team said in a note to clients.

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The S&P 500 stood at 3,848.94 as of 2:20 p.m. ET Wednesday, up 2.5% year-to-date.

Stocks are sitting at record highs, but some analysts have raised concerns around whether the market is irrationally looking through significant risks. Indicators including retail sales and weekly jobless claims worsened in recent weeks, and COVID-19 cases continue to climb across the country.

Vaccination and the chances of a Biden-backed stimulus bill have fueled the market's latest gains, but herd immunity isn't likely to be reached for months. Looking past the near-term, RBC named higher corporate taxes, tech-sector regulation, and a pullback of Federal Reserve support as other risks to its bullish outlook.

The strategists expect market leadership to continue shifting to value and cyclical stocks from the growth names that thrived through 2020. Financials, materials, and energy stocks are set to outperform, while real-estate investment trusts, consumer staples, and communications stocks will lag in the upswing, the firm added.

Looking abroad, non-US stocks will outpace domestic names as they benefit from renewed investor interest, according to the note. US equities tend to rise in lockstep with growth stocks, and the group's surge throughout the last year has left international stocks undervalued, RBC said.