Investing.com -- U.S. stocks are more sensitive to changes in economic growth than to moves in Treasury yields, according to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.

Calvasina suggests that equity markets tend to weaken in periods when both real GDP and 10-year yields decline.

“We found that on a median basis, the S&P 500 tends to fall by 12% during quarters where both real GDP and 10-year yields are falling,” she wrote in a note.

The study, which looked at historical data since 2000, adds to RBC’s earlier concerns that markets could be vulnerable to a “growth scare” with a potential drawdown of 14-20% from recent peaks.

Recent market weakness has already materialized, with the S&P 500 down 6.6% from its recent high as of last Thursday’s close.

Investor sentiment has deteriorated sharply, with net bulls in the weekly AAII survey falling to -37.8%, more than two standard deviations below the long-term average. Calvasina noted that similar levels of bearishness were seen in past major market drawdowns, including in 1990, 2009, and 2022.

The strategist also pointed to growing concerns in the corporate and political landscape. New orders in the ISM manufacturing survey fell into contraction territory, while political sentiment, tracked through approval ratings, has continued to decline.

Meanwhile, Trump’s net favorability in polling data continued to decline last week, based on the RealClearPolitics average.

“This matters from a stock market perspective because net approval has been aligned with S&P 500 pricing in recent months, similar to how Trump’s polling data was tracking the S&P 500 throughout 2023-1H24,” Calvasina explained.

Valuations have come down across major equity indices, with the biggest declines in small caps. Calvasina pointed out that while lower valuations often present buying opportunities, current levels are not yet signaling a contrarian buy.

“Valuations have come down for the biggest names in the S&P 500 and the rest of the index, but at 24x and 17x respectively, are still well above average,” the report said.

In sum, RBC maintains a year-end S&P 500 target of 6,600 but acknowledges that downside risks are now higher.

“We have seen the US equity market on a rocky path higher through year-end, and have believed that our 6,600 can absorb a 5-10% drawdown. The risks of a drawdown of more than 10% have admittedly grown, however. If that occurs, we see a “growth scare” of a 14-20% decline from peak as most likely, which could shift us into our bear case,” it concluded.