The big things you need to know: First, we enter 3Q26 reporting season seeing risks in both directions. Second, the investors we met with in Canada last week were best described as cautiously optimistic, with earnings, midterms, and confusion over recent resiliency in the equity market all top of mind. Third, other things that jump out this week include the recent surge in US performance relative to non-US which may be on borrowed time, the bounce back in investor sentiment, and a few important shifts in sector valuations ahead of reporting season.
If you’d like to hear more, here’s another five minutes.
Starting with Takeaway #1: Risks In Both Directions Heading Into 3Q26 Reporting Season
ur meetings highlights how in:
At the same time, we find it interesting that there has continued to be little movement in bottom-up consensus EPS growth forecasts for 3Q26, 2026, and 2027 since Labor Day, at least outside of Tech, Energy and the Mag 7. We highlighted this a few weeks ago, noting that this helped to explain why Tech and Energy have been the best performing sectors in the S&P 500 of late. It’s possible that weak price action in the non Tech & Energy sectors has already been baking in the potential for downgrades to the earnings outlook, improving the set up for these areas of the stock market if commentary is not as bad as feared.
However, we aren’t seeing signs of a washout on our earnings sentiment indicators. The rate of upward EPS estimate revisions for the S&P 500, its top 10 market cap names, and the rest of the index has eased back, but hasn’t fallen into negative territory yet either.
One final thought – we enter 3Q26 reporting season on the heels of back-to-back quarters that saw a massive upside surprise to consensus EPS forecasts. 2Q26 was expected to come in at around 20% but ended up at 34%. 1Q26 was expected to come in at a little more than 10% but ended up at 30%. There are very good reasons to go into the upcoming reporting season in a cautious mood, but it’s admittedly been tough to argue against S&P 500 EPS lately.
Moving on to Takeaway #2: Color From Canada
r EPS growth rates to slow in:
Wrapping up with Takeaway #3: What Else Jumps Out
First, the US has hit a new YTD high relative to non-US developed market equities in terms of performance. This trade had been range bound over the last few quarters and saw a big surge for the US in late summer.
We’ve favored the US recently but have started to be on the look out for a potential geographical rotation, as the US is now starting to look a little pricey relative to non-US developed markets on a five year look back.
Second, investor sentiment bounces back. After falling sharply, net bulls on the weekly AAII investor survey have bounced back to +1.3% last week, though the four-week average remained at -12.6%. Overall, this model is telling us that sentiment has stabilized after recently hitting a level that tends to point to strong 12-month returns in the S&P 500.
Third, subtle sector valuation shifts. As 3Q26 reporting season comes into view a few sectors have made some important but subtle moves on our S&P 500 valuation model. Financials and Consumer Discretionary have fallen out of expensive territory due to improvement in their relative P/E’s which are now back to / slightly below the long-term average. They are admittedly still a little above average in absolute terms, and aren’t yet back into what we would consider to be attractive territory, but this is noteworthy improvement as reporting season gets underway. Within Financials, we do still admittedly see slightly elevated valuations in the Capital Markets industry which contains Investment Banks and Alternative Asset managers among other areas, and continue to see more valuation appeal in Banks and Insurance.
Meanwhile, Tech has returned to slightly expensive territory, as it is now a little above the long-term average on absolute and relative P/E. Utilities and Industries remain expensive, while other sectors remain attractively valued. Heading into reporting season, we generally think the set up for Financials and Consumer Discretionary has improved, given what we’ve seen in our valuation work, and think that the set up for Tech has deteriorated.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
