RBC boosts its S&P 500 price target this year to 5,150 but warns that it will be a choppy year ahead

• RBC increased its 2024 price target for the S&P 500 to 5,150 from 5,000, representing upside potential of 8%.

• The bank said despite its bullish outlook, it won't be smooth sailing for the stock market this year.

• Elevated investor sentiment, a slowdown in the economy, and the 2024 presidential election are headwinds for stocks.

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RBC is getting more bullish on the stock market in 2024, but it won't be smooth sailing for investors, according to a Sunday note.

The bank boosted its 2024 price target for the S&P 500 to 5,150 from 5,000, representing potential upside of about 8% from current levels. Analysts cited the strong year-end rally that occurred in November and December, when the S&P 500 surged about 14%.

"The main thing that has changed in our math is the starting point of our analysis given the strong move in the S&P 500 at the end of 2023," RBC explained.

While it expects the S&P 500 to jump to record highs for the first time in more than two years, the bank cautioned that there are plenty of headwinds the stock market will have to face.

Those include overly bullish sentiment, expectations for a sluggish economy, uncertainty around the US presidential election, and potential shift from US stocks to other markets, RBC said.

Elevated investor sentiment, as measured by the weekly AAII survey, suggests that forward returns will be weak for the next three to six months, which RBC said could be "just the beginning of a phase of turbulence."

"At current levels, this [sentiment] model is telling us to look for a flat S&P 500 over the next three months, and a gain of 6.4% over the next 12 months," RBC explained.

Meanwhile, RBC noted uncertainty will likely surge for the economy and stock market as the 2024 presidential election gets closer.

"Presidential election years often follow a similar pattern, with a weak start, rally into the fall, choppiness as election day draws near, and a post election rally. While 2024 may not conform to this exact pattern, it does provide another reason to be on guard for an early year pullback," RBC said.

But there is also one big tailwind that should work for the stock market in 2024, and that's the fact that valuations can stay higher than investors realize.

RBC's valuation model is calling for a trailing price-to-earnings ratio of 23.2x at the end of 2024, which translates into the S&P 500 trading at 5,413 when using RBC's earnings per share estimate of $234.

"The key things to know are that this model is telling us that the stock market ended 2023 at a valuation level that was reasonable in the context of the stronger than anticipated economy and the moderating in inflation that occurred, and that we should look for additional gains in the equity market and a trailing P/E of around 23x in 2024 if inflation continues to ease and interest rates come down a tiny bit more," RBC explained.

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