RBC Capital Markets strategists say the most recent episode of volatility pulled down lofty U.S. equity valuations but left them shy of the deeply discounted territory typically associated with cyclical market lows. The firm’s team, led by Lori Calvasina, describes the move as a partial reset that supports the potential for a near-term rebound without constituting the kind of broad washout seen at prior market troughs.
At the trough of the recent dip, the S&P 500 had declined 4.5% from an early June high. That decline fell just short of RBC’s Tier 1 "garden variety" pullback, which the strategists define as a 5% to 10% drop. The market subsequently stabilized after a diplomatic development - a reported agreement between the U.S. and Iran to end their conflict - helped calm conditions.
"Broadly speaking, across the major indices we track we think it’s fair to say that a decent amount of the froth was taken out," the strategists wrote. They added, however, that the degree of valuation improvement in this wobble did not match what was observed at the March 30 low.
On valuation metrics, the weighted median forward price-to-earnings ratio for the S&P 500 eased to 21.5 times at the midpoint of last week. That reading is close to the April 2025 low of 21.1 times and near the March 2026 trough of 20.8 times.
Small-cap stocks performed notably worse through the adjustment. The Russell 2000’s weighted forward P/E fell only to 19.1 times, leaving it well above its prior four major lows, which ranged from 13.2 times to 16.4 times. The largest S&P 500 constituents landed between those extremes: the equal-weighted median forward P/E for the top 10 names by market capitalization retreated from a recent high of 31.6 times to 26 times. That reduction is meaningful, yet still elevated when compared with recent low ranges in the 19-23 times band.
Calvasina highlighted areas where the so-called broadening trade could retain traction. Small caps, selected cyclical sectors, and equities in non-U.S. developed markets continue to present a valuation case that may have room to run, although the strategists caution that these pockets warrant closer monitoring. On a two-year forward P/E basis, the Russell 2000 still shows significant relative valuation appeal despite its near-term multiple moving closer to average.
Materials and Financials - two sectors where RBC remains overweight - have seen their valuation advantage erode modestly but not vanish. The sectors currently sit slightly above their long-term absolute averages while remaining slightly below average on a relative basis, according to the strategists.
Sentiment indicators reflect partial, but incomplete, repositioning. The weekly AAII survey showed net bullishness falling sharply to -17.3% last week, an improvement from the depths of March 2026 but not a complete reset to contrarian extremes. Commitments of Traders data from the CFTC revealed a pullback in positioning in U.S. equity futures, although overall positioning levels remain elevated.
RBC kept its 12-month S&P 500 price target unchanged at 7,900 and noted that weekend developments in the conflict cited above point to upside risk to that target. Still, the strategists flagged a number of risks that have not fully abated: the midterm elections, the possibility of downward revisions to 2027 earnings estimates, and ongoing profit-taking pressures in semiconductors.
"Valuations aren’t standing in the way of a rebound, but don’t have a lot of room available before the ceilings of the recent past are tested," the strategists wrote, encapsulating the view that while the market can climb from here, stretched multiples could constrain upside if momentum stalls.
What this means for investors
Investors should recognize the progress in valuation repricing while remaining mindful that multiples are not at levels that historically correspond to a full washout. Opportunities may exist in small caps and cyclical sectors, but those opportunities come with the caveat that relative and absolute valuation cushions have narrowed.