Welcome to RBC’s Markets in Motion podcast, recorded September 2nd, 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 two big things you need to know:

• First, 2Q earnings season wrapped up with downward pressure on 2026 sector EPS forecasts and Small Cap operating margin forecasts.
• Second, following Friday’s news that the US Court of Appeals for the Federal Circuit had ruled against the reciprocal tariffs, we think corporate uncertainty around tariffs will remain elevated.

If you’d like to hear more, here’s another 5 minutes.

Flip to slide 2

Starting with Takeaway #1: 2Q earnings season wrapped up with downward pressure on 2026 sector EPS forecasts and Small Cap operating margin forecasts

Two sets of earnings-related stats caught our attention as we reviewed the nearly final numbers for 2Q25 late last week.

• First, the 2026 EPS growth rate implied by bottom-up consensus forecasts has risen since the end of June for only two sectors in the S&P 500 – Tech and Materials.
  • We’ve discussed in recent podcasts how the 2026 growth rate implied by consensus forecasts for the broader S&P 500 is down from mid-year and has been flat in August, illustrating to us that while 2Q25 has been much better than expected, that excitement hasn’t translated into much incremental optimism about future earnings growth.
  • This sector study reinforces that idea to us.

Flip to slide 3 (last slide)

• Second, operating margin expectations embedded in bottom-up consensus forecasts have moved meaningfully down in 2Q25, 3Q25, 4Q25, and 1Q26 for the Russell 2000.
  • While there’s also been some pressure on bottom-up consensus operating margin forecasts for the S&P 500 in 3Q25, overall margin forecasts appear to have been more resilient in the Large Cap segment, particularly in 1Q26 and 2Q25.
  • This may be reflective of the idea that Small Caps are having a tougher time managing through tariffs, and adds to our conviction – which we discussed in detail in our last podcast - that a continuation of a Fed cut-optimism-driven-outperformance trade in Small Caps may still end up being fairly short-lived.

Moving on to Takeaway #2: Following Friday’s news that the US Court of Appeals for the Federal Circuit had ruled against the reciprocal tariffs, we think corporate uncertainty around tariffs will remain elevated, though lower than late spring levels.

• One of our biggest takeaways from 2Q25 reporting season was that companies continued to view the tariff backdrop as dynamic, evolving, and uncertain, despite the general dialing down of tariff levels from those announced April 2nd. There are both positives and negatives associated with the continuation of elevated uncertainty.
• On the positive side, the potential for a further dialing down of overall tariff levels (beyond the obvious hope that tariff cost pressures could ease and the short-term boost to earnings estimates that would provide) is that it could keep corporates from taking more drastic actions to offset tariff costs. During this past reporting season, we noticed in our transcript reading that a few companies referred to the idea of “no regrets” actions in their discussions of tariff mitigation, with one indicating that they had not taken actions that could not be easily undone. While this was not a level of detail most companies went into or that most companies made, it left us thinking that this was a rational approach that might have been taken on by others as well.
• On the negative side, even if it’s due to hope for improvement, continuation of elevated uncertainty could contribute to further caution or delays in corporate customer decision-making that a number of companies continued to refer to during the last reporting season.
• We won’t engage in speculation about what the Supreme Court may or may not decide and will leave that to the legal experts. That being said, it has seemed clear to us, since we heard the President outline his vision in a speech to the financial community a year ago, that tariffs are a core belief of the current administration and we think it makes sense to assume that tariffs, one way or another, are likely to remain a part of the US equity market backdrop for the foreseeable future. Sectoral tariffs, tariffs codified into law by Congress, and/or other authorizations are some of the ways that tariffs could persist.

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