Welcome to RBC’s Markets in Motion podcast, recorded October 13th, 2025. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
The big things you need to know: First, earnings sentiment has been fading for the broader US equity market and is at a critical juncture for the biggest market cap names and Tech sector within the S&P 500. Second, macro signals were mixed from the S&P 500 companies that reported over the past few weeks. Third, our thoughts on Friday’s weakness in the S&P 500.
If you’d like to hear more, here’s another six minutes.
Starting with Takeaway #1: Earnings Sentiment Has Been Fading, and Is at a Critical Juncture for the Biggest Market Cap Names (and Tech Sector) in the S&P 500
This is an extremely important reporting season. Despite the recent Fed cut and the anticipation of more to cuts to come, there’s been no valuation expansion in the S&P 500 of late as bottom-up forward P/Es have been unable to make new highs since August, even though the S&P 500 has (until late last week) continued to creep higher in terms of price.
- Overall, earnings sentiment has faded since the last reporting season, driven by weakness outside of the biggest market cap names.After surging during the last reporting season to levels on par with typical highs seen in recoveries outside of major crises, the rate of upward EPS estimate revisions for the S&P 500 has retreated to just 53.6% in our latest update, with the index ex the top 10 market cap names leading the way down. This indicator has also been coming down for most S&P 500 sectors, turning slightly negative for Materials and Industrials.
- Importantly, earnings sentiment is at a critical juncture for the biggest market cap names in the S&P 500.The rate of upward EPS estimate revisions has been much stronger and resilient this part of the market but is hovering at levels close to past peaks. We have seen a tiny bit of slippage in recent updates that’s worth keeping a close eye on, and calls into question whether this part of the market is poised for some deterioration as well. Trends for the Tech have been similar. Both have been carrying a heavy earnings burden for the S&P 500, and if earnings sentiment for these parts of the US equity market fade, we think it will be difficult for the S&P 500 to avoid a near-term pullback.
- Financials will dominate the tape this week. We still like the sector, but don’t see them as a bellwether for this reporting season. Financials has been another area of resilience on our earnings revisions indicator, as its deterioration has been much milder than what we’ve seen in most sectors. Fundamentals have been stronger in this sector than others, which is only indirectly impacted by tariffs. M&A is also starting to percolate. In this context, we don’t think an upbeat read from the Financials this week would give us too much information about how the rest of reporting season will pan out. On the flip side, as is the case with Tech, if commentary from the Financials disappoints, we think it would damage what has been an important pillar of support for the US equity market.
Moving on to Takeaway #2: Macro Signals from the Late-September/Early-October Reporters Were Mixed
- Based on what we read in earnings calls, positive takeaways included one company’s expectation that small businesses will stay resilient due to the passage of the tax bill and rate cuts, along with commentary on strong travel demand from companies air travel and cruising. Meanwhile, one consumer company alluded to head count in its discussion of making sure it has the right cost structure in place, while another referenced soft volumes among its larger customers. On the consumer, value-seeking and choiceful behavior was emphasized by several companies, with challenges for low and middle income highlighted. One company noted the consumer is stressed all over the world and another highlighted concerns about socioeconomic issues in various cohorts. Several highlighted greater-than-anticipated inflation and commodity costs. On tariffs, companies referenced worse-than-expected impacts.
- Looking ahead, we will be reading for more color on all of these themes. We’re also keen to hear what companies are saying about whether policy-related uncertainty has improved enough to allow customer decision-making to unlock and to what degree, how much pre-tariff inventory companies are still sitting on, whether some companies are keeping inventories lean purposefully, and any new insights on whether corporate and consumer demand was pulled forward earlier this year due to tariffs. On tariff mitigation, we’ll be reading for clues on whether certain strategies may be running their course or can continue into calendar 2026, and whether companies may be poised to take more permanent actions like layoffs to protect margins.
- We’ll also be keeping an eye on what the AI-centric companies are saying about their own demand and margins, and what other companies are saying about their own AI spending and use cases. Capex is a theme we’re paying attention to generally, to gain insight as to whether the bonus depreciation and R&D expensing provisions in the OBBB may soon spur a meaningful uptick in activity.
Wrapping up with Takeaway #3 - thoughts on Friday’s price action, when the S&P 500 tumbled 2.7% on China tariff concerns.
- While we’re constructive on the stock market on a 12-month-forward basis with a 7,100 2H26 S&P 500 price target, in the near to intermediate term we’ve been concerned about the need for a period of digestion in the US equity market, more specifically a “garden variety” pullback of 5-10% in the S&P 500 using our Four Tiers of Fear framework. Stretched valuations, seasonality, the August/early-September decline in net bulls in the AAII survey (which has now reversed), fading earnings revisions trends, and the choppy price action in bitcoin have all been concerning data points to us in recent months, along with our sense (based on client conversations) that the S&P 500 pricing stopped baking in economic ripple effects from tariffs over the summer. If more weakness transpires, we’d expect downside in the S&P 500 to be in the 6,100-6,400 range.
- It worth noting that October has been a down month in the S&P 500 in each of the past two years and three of the past five. While the S&P 500 defied the seasonal playbook, which had been calling for a decline in the index in September, it’s sticking to it so far in October.
- In our client meetings, institutional investors have seemed nervous over the past few weeks, but not about China tariffs. In our last two podcasts we have pointed out that US equity investors (both domestic and abroad) have sounded wary and cautious on US equities due to their own concerns about valuations, AI, a weakening labor market, capex that hasn’t been quite as strong as anticipated over the summer, and the idea that rate cut tailwinds for US equities may have been pulled forward. In this context, we’ve become more worried about profit-taking as a catalyst for a downward move.
- And lastly, classic defensives – Staples, Utilities, Health Care, and REITs – all outperformed on Friday as the stock market tumbled. We’ve been and remain market weight these sectors, but find we are most interested in Health Care from a short-term tactical perspective (should the pullback that began late last week persist) due to attractive valuations and earnings revisions that have been a little more resilient than other sectors. Our US analysts have been constructive on performance despite elevated policy risk, according to the results of our latest RBC analyst outlook survey. Funds flows to Health Care have also been looking better in terms of trend than what we’ve seen for Utilities, which is our usual go-to defensive in times of stress but may not be as resilient as it normally is if AI worries help drive further declines in the major indices.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.