Earnings season offers U.S. equity investors a chance to put the macro on the backburner, and refocus on the micro
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 U.S. 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.
On the quantitative side, in terms of key stats. At the broader index level, we’ll be keeping an eye on the rate of upward EPS estimate revisions (our favorite gauge of earnings sentiment) for the S&P 500, the biggest market cap names in the index, and the rest of the index, along with the Russell 2000 and the sectors in both index families. One of the things we think contributed to choppy stock market performance in late October/early November was the peak in the rate of upward revisions that was seen in the S&P 500 in August, including both the top market cap names and the rest of the index. A new high in the rate of upward revisions in any of these slices could add to stock market optimism and refocus U.S. equity investors on the micro at a time when macro issues have dominated the headlines (though not the price action). We also think that trends in this stat could play a role in the leadership rotation that’s been underway in the U.S. equity market. A new high in the rate of upward revisions or stronger trends in either the biggest market cap names or the rest of the index could reflect greater earnings excitement in one part of the stock market or the other, for example, and push investors back to either the old leadership or the broadening trade that’s been in place for the past few months.
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.
What else jumps out in our latest updates
To begin with, RBC’s new Fed call is not a game changer. Our colleagues in RBC Rates Strategy changed their Fed call on Friday and are no longer looking for a cut at the January meeting or in 2026. If they are correct, this would have a minimal impact on our outlook for the S&P 500 since the index’s returns tend to be strongest during 12-month periods when the Fed does nothing, a tiny bit stronger than the index’s typical performance when the Fed cuts a few times in a 12-month period, the assumption that’s still embedded in consensus expectations and that is currently baked into our 7,750 12-month-forward S&P 500 price target.
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 U.S. 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.
Moving on, we’re at an important crossroads for Small Caps. As we were reviewing the various performance charts that we monitor over the weekend, one thing that was particularly striking to us was that as of Friday’s close, the Russell 2000 was back to its mid-October high relative to the S&P 500 when the first attempt at a Small Cap breakout versus Large Cap stalled, and a tiny bit above the level where the second Small Cap breakout attempt vs. Large Cap fizzled out in December. In our view, the coming weeks represent an important test in terms of whether a new leadership cycle in Small Cap has begun.
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 U.S. 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 U.S. equity performance. There were four big takeaways for us in last week’s update from EPFR on U.S. equity funds flows.
First, passive retail flows to U.S. equity funds have been solid in recent weeks, suggesting to us that retail investors have been helping to support the rally in U.S. equities to start the year.
Second, when we zoom out, we see that flows to U.S. 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 U.S. equity market performance and the latter as a tailwind given the heavy market cap representation of the U.S. in global benchmarks.
Third, funds flows are showing a slight improvement for Western European equity funds, pointing to the possibility that some geographic rotation was occurring within the global equity community as 2025 wound down and 2026 began. We will be keeping a close eye on this data, along with investor conversations, to gauge whether a new “Sell America” trade may be returning to the equity market. This is an issue that we have seen as a key risk/headwind to monitor and one that could reasonably be viewed as having grown/strengthened in the aftermath of recent geopolitical and central bank developments (though RBC’s Rates Strategy team has argued that recent events related to the Fed can be viewed as actually having strengthened perceptions of Fed independence).
Fourth, at the sector level we note improving flows for Financials and Industrials, two of the cyclical workhorses of the U.S. 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 U.S. equities today – renewed and growing optimism on the U.S. 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.
