The big things you need to know: First, 3Q25 reporting season has gotten off to a strong start on beat rates for the major indices, but we are continuing to see deterioration in the rate of upward EPS estimate revisions for the S&P 500, the Russell 2000, the biggest market cap names in those indices, and the rest of both indices when their top weights are excluded – something we continue to see as a challenge for performance if it persists. Second, we run through the main macro takeaways we found in our review of last week’s S&P 500 earnings calls. The tone on the overall macro, consumer and tariffs came across as mixed, with a number of companies expressing optimism about improvements / stabilization underway or potentially coming into view. Third, other things that jump out in our updates this week include a new study we’ve published on the relationship between ROEs and P/Es in the major Small, Mid and Large Cap indices.

If you’d like to hear more, here’s another five minutes.

Starting with Takeaway #1: The Early Stats for 3Q25 Reporting Season – Strong on Beats, Still Seeing Deterioration on the Rate of Upward Revisions

• Reporting season is off to a strong start from the perspective of beat rates. In our latest update, 83% of S&P 500 companies were beating consensus on EPS while 85% were beating on sales. Both stats were up slightly relative to final levels in place for 2Q25.

• But we still continue to see downward pressure on the rate of upward EPS estimate revisions for the broader market indices. This is a gauge of earnings sentiment and is more of a forward-looking indicator than beat rates. This stat is now tracking at 51.9% for the S&P 500 and 46.8% for the Russell 2000.

• There are also some signs that Large Cap Growth and the top 10 market cap names in the S&P 500 are seeing their dominance on this stat slip relative to Large Cap Value and the rest of the index now that the erosion in earnings revisions is also being seen in the mega cap Growth names that have been the workhorses of the S&P 500 from an earnings perspective. It’s too early to know if this trend will persist, however, as there are still many more companies to hear from (by our count 162 in the S&P 500 are coming this week, including several in the top 10 market cap cohort).

• We acknowledge that the top 40 names have a higher-than-usual percent of negative earners. One of the reasons why we like to look at the rate of upward EPS estimate revisions as a gauge of earnings sentiment is that it does allow us to include loss makers in our analysis.

Overall, we think the story of 3Q25 reporting season is still a work in progress. We think earnings are providing a solid foundation for the US equity market, but that it will be difficult to replicate the same kind of surge in earnings optimism that helped power markets higher in the last reporting season. That is something we think the deterioration in the rate of upward EPS revisions speaks to. Additionally, if we continue to see deterioration in the rate of upward revisions for the broader indices and the heaviest market cap names in particular, we think it could be a contributing factor to a garden-variety pullback in the S&P 500, which still remains a risk for equity markets, in our view – though perhaps not one that materializes until downward revisions return for the S&P 500 itself.

As has become our custom, our team read through last week’s earnings call transcripts for the S&P 500 companies that reported, looking for insights into the macro backdrop.

• On the positive side some companies in a number of different industries noted demand trends had improved recently after weakness earlier in the fall or year, while others cited optimism around lower interest rates and deregulation tailwinds and greater certainty on tax policy and / or strong demand from certain end markets ranging from flying to AI. On the negative side, companies highlighted a soft housing market, weak hiring trends, elevated inventories from pre-buying ahead of tariffs, consumer pressures, softness in government-related demand, and the persistence of a “wait and see” mentality among some customers. Some companies noted they were keeping some caution in their outlooks while others displayed a more clearly optimistic tone.

• Meanwhile, the consumer companies that reported, along with several in related industries, noted the pressures on consumers in place generally or in certain segments due to affordability, interest rates, and economic uncertainty. “Discerning” was one adjective used to describe the consumer by one company, while a “sharper value” focus was highlighted by another. Delays on big-ticket purchases, particularly those requiring debt financing, were a recurring theme for several companies, with one company noting it would take more than one rate cut for things to improve. One toy company noted that higher-income consumers were still spending “robustly” on toys while lower-income brackets were more price sensitive. Strength in luxury and trade-down effects were also highlighted.

• As the shutdown has turned into a lengthier one by historical standards, we started to get a bit more commentary from companies on this topic last week. Several indicated they had not seen much of an impact so far, but some also indicated that impacts would become more meaningful if the shutdown dragged on. Some companies suggested the shutdown could be contributing to customer hesitancy or noted that delays in government expenditures could occur. Another cited delays in IPOs. Several companies jumped out for indicating that the shutdown has contributed to some caution in their outlooks or uncertainty this created for cash flows.

Wrapping up very quickly with Takeaway #3: what else jumps out.

• Overall, we think this analysis illustrates how general investors in US equities are paying up for earnings quality, and why investors should not rely too much on the idea of cheap relative P/E multiples in Small Cap relative to Large Cap being able to help spark a new longer-term cycle of Small Cap outperformance.

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.