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  • The current easy monetary policies of the Federal Reserve should continue to support stocks into year-end, according to a Tuesday note from RBC.
  • The bank raised its 2021 S&P 500 price target by 5% to 4,325, representing potential upside of about 4% from current levels.
  • "We see a little more room for stocks to climb higher this year, but we also continue to expect a pullback or heightened volatility in the market," RBC said.
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The S&P 500's year-to-date gain of more than 10% could extend further by year-end as the Fed continues to implement easy monetary policies, according to a Tuesday note from RBC.

The bank raised its year-end S&P 500 price target by 5% to 4,325, up from 4,100, as it expects slight multiple expansion "commensurate with the modest expansion we are seeing in the Fed's balance sheet." A move to 4,325 in the S&P 500 by year-end would translate to a 15% gain for 2021, just below 2020's return of about 18%.

The Fed is buying $120 billion worth of bonds every month, and continues to keep the Fed funds rate anchored to near 0%. A jump to 4,325 in the S&P 500 would represent upside potential of about 4% from Tuesday morning levels.

"We see a little more room for stocks to climb higher this year, but we also continue to expect a pullback or heightened volatility in the market," RBC said.

A key downside factor that could spark a sell-off in stocks includes the Fed beginning to taper its monthly bond purchases earlier than anticipated, RBC said. Most expect the Fed to begin tapering in 2022, but if they begin in 2021, that would likely scare investors.

Additionally, the reflation trade into cyclicals and out of growth could present heightened volatility for the stock market since it is mostly dominated to tech, internet, media, and telecom stocks, RBC said.

"Market internals may end up looking more constructive than the index itself given the bias of the S&P 500 to what has become a defensive bucket of market cap," RBC explained. But with a return of stock buybacks and dividends this year, RBC's year-end target remains biased to the upside.

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