The big things you need to know: First, our thoughts on earnings heading into 4Q25 reporting season – questions we think need answering and stats we’re watching. Second, other updates include our thoughts on implications in house views on the Fed for our own US equity market outlook, why we think last week’s economic data releases support the strong start to the year in US equities, why we think Small Cap performance is at an important crossroads vs. Large Cap, and how recent trends in funds flows capture the complex crosscurrents in place for US equities today.

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

Starting with Takeaway #1: Earnings Season Offers US Equity Investors a Chance to Put the Macro on the Backburner, and Refocus on the Micro

4Q25 reporting season kicks off this week with the big Banks. Here’s a rundown on what we’re watching and hoping to learn:

• On the qualitative side, in terms of company commentary. Each reporting season our team reads through S&P 500 earnings call transcripts in an effort to glean macro takeaways, particularly “bread crumbs” that a few companies may drop, which haven’t yet become part of the broader conversation. As always, we’ll be keeping an eye on general outlooks and what companies say on the health of the consumer and C-suite sentiment. Getting more specific, topics we’d like to hear from companies on include trends in and plans for capex (both their own and their customers’, both AI related and non-AI related), for non-Tech companies, their AI use cases and anticipated impacts for productivity, earnings, revenues, and/or margins (using specific numbers for their own companies, not just general trends in corporate America at large), how tariff-impacted companies are thinking about the implications for their cost, revenue, and margin profiles if SCOTUS doesn’t uphold the IEEPA tariffs, and labor market dynamics (including whether AI technologies are impacting hiring and firing at their own companies). Perhaps this list is wishful thinking, but it points to some of the important dynamics that we think will bear on US corporate profitability in the year ahead, and in some cases also points to areas where company commentary has simply been conspicuously lacking in recent quarters.

• At the S&P 500 sector level, sectors with the strongest revisions profiles of late have included Tech, Utilities, Health Care and Financials (when measured as the rate of upward EPS and revenue revisions), suggesting to us that the bar may be higher in these sectors than others. It’s also worth noting that the rate of upward EPS estimate revisions has been weak but improving for Consumer Staples – a potential sign of better fundamentals in a very inexpensive sector. By contrast, the improvement that was seen in Energy sector revisions in late 2025 has proved fleeting as its trend has turned negative again.

Moving on to Takeaway #2: What Else Jumps Out in Our Latest Updates

• Next up – last week brough some supporting fundamental evidence for the stock market’s strong start. On the economic front, last week’s soft data releases generally supported the risk-on tone to US equity market performance as 2026 got underway. We continued to see signs of stabilization in University of Michigan consumer sentiment, driven by stabilization in both current conditions and expectations.

• The Challenger layoff data also highlighted an easing of layoff announcements both overall and in key industries like Tech as well as a number of cyclical areas where spikes had previously been seen.

• Looking beyond performance, it’s worth noting that after having moved back down to levels nearly in line with the average late last year, the market cap weighted NTM forward P/E of the Russell 2000 has moved up to 18.5x. There is some room for this flavor of the Russell 2000 P/E to move back up before it returns to its most recent high of 19.1x achieved in November 2024, but not a lot of room.

• While we generally thought last week’s batch of economic data pointed to a strong foundation that justifies the strong start to the year in US equities, we confess that the monthly NFP print didn’t look strong enough to us to signal that a durable shift in Small Cap leadership is underway. Nor did the sluggish reading in the headline index from the ISM manufacturing report. Historically, durable Small Cap outperformance cycles have been accompanied by a move up in the ISM manufacturing index and an acceleration in monthly jobs growth in the NFP data. We’ve also seen outflows from Small Cap funds in recent updates including outflows from passive funds.

• And wrapping up with flows, which are a good lens into some tailwinds and headwinds for US equity performance. There were four big takeaways for us in last week’s update from EPFR on US equity funds flows.

• First, passive retail flows to US equity funds have been solid in recent weeks, suggesting to us that retail investors have been helping to support the rally in US equities to start the year.

• Second, when we zoom out, we see that flows to US equity funds as a whole have been choppy in recent weeks, though flows to global equity funds have been strong. We see the former as a headwind to US equity market performance and the latter as a tailwind given the heavy market cap representation of the US in global benchmarks.

• Fourth, at the sector level we note improving flows for Financials and Industrials, two of the cyclical workhorses of the US equity market, along with continued strength in Energy and Materials/Commodities funds.

• Overall, we think these trends in funds flow data highlight the complex dynamics underpinning US equities today – renewed and growing optimism on the US economy, but within the context of a global investor community that has become more open to geographically diversifying their equity exposure and has been presented with some new reasons to potentially do so as the new year has gotten underway.

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