S&P 500 Sector Recommendation Shuffle

The big things you need to know:

• First, we are making several changes to our S&P 500 sector views with upgrades to Tech to overweight and Consumer Discretionary to market weight, alongside downgrades of Communication Services to market weight and Utilities to underweight.
• Second, the expected growth rate for 2Q26 S&P 500 EPS has continued to drift up ahead of reporting season, but trends in beat rates and EPS revisions have been mixed.
• Third, on our broader outlook we’re on guard for a shift back into US and mega cap Growth leadership.

Welcome to RBC’s Markets in Motion podcast, recorded July 13th, 2026. 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, we are making several changes to our S&P 500 sector views with upgrades to Tech to overweight and Consumer Discretionary to market weight, alongside downgrades of Communication Services to market weight and Utilities to underweight. Second, the expected growth rate for 2Q26 S&P 500 EPS has continued to drift up ahead of reporting season, but trends in beat rates and EPS revisions have been mixed. Third, on our broader outlook we’re on guard for a shift back into US and mega cap Growth leadership.

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

Starting with Takeaway #1: Our S&P 500 Sector Recommendation Shuffle

Following last week’s release of our quarterly RBC analyst outlook survey, we are making a number of changes to our S&P 500 sector views.

First, we are upgrading Tech to overweight from market weight, while downgrading Communication Services to market weight from overweight.

• Reasons for our Tech upgrade include strong upward EPS and revenue revisions trends, inflows to the sector that are trending higher (and bounced back after a week of steep outflows recently), and a positive performance outlook score among our US Tech analysts in the survey. Tech valuations admittedly aren’t cheap, but in our latest update the sector is only slightly above the long-term average on median absolute and relative P/E.

• While the valuations in Communication Services look attractive on our work, we’ve seen a bit of weakness emerge in our EPS revisions indicator for this sector, and Telecom flows (the closest proxy for this sector) have been choppy. Comm Services also had a negative performance outlook score for the US in our latest analyst survey.

Second, we are upgrading Consumer Discretionary from underweight to market weight.

• Our survey revealed negative views on consumer-oriented sectors across the globe, including the US, compared to other sectors, and left us with the impression better performance in this sector would be a pain trade for investors.

• While consumer confidence/sentiment survey data has been weak, there have been some signs of attempted stabilization, and Consumer Discretionary tends to outperform when consumer sentiment on the University of Michigan survey moves up.

• On our analyst survey, while our US analysts gave the sector a neutral performance outlook score, it actually was a little better than the negative view of the Consumer Staples team.

• On valuation, Discretionary is slightly above the long-term average on relative and absolute P/E, and EPS revisions are also fairly balanced.

• Overall, Discretionary comes across to us as a sector more deserving of market weight status than underweight status.

Third, we are downgrading Utilities to underweight from market weight.

• With the upgrade of Consumer Discretionary, we find that we are in need of a new underweight sector.

• Utilities gets the nod for three reasons.

• First, it is one of the most expensive sectors in the S&P 500 on our model.

• Second, our US analyst team had a neutral performance outlook for the sector in our latest survey, one of the least constructive views.

• Third, flows have been weak.

• Earnings and revenue revisions trends are admittedly positive, but weaker than what we see for other sectors.

In terms of other sectors we’re watching:

• Industrials (which we are market weight) was a candidate for a downgrade given extremely expensive valuations and previously strong flows that have shown some signs of fading. But fundamentals seem solid as evidenced by strong EPS and revenue revisions. Industrials also captured a positive performance outlook score for the US in our latest analyst survey, despite a neutral view on valuations.

• Meanwhile, Energy (which we are market weight) was a candidate for an upgrade given the positive score from our analysts in our survey on all of the non-midterm questions and had one of the stronger performance outlook scores. The sector also looks attractively valued on our model, and EPS revisions trends are strong. What held us back is that funds flows for the sector have turned deeply negative.

Moving on to Takeaway #2: The Signals From The Early Earnings Stats

• Bottom-up consensus EPS growth forecasts are anticipating yr/yr growth of 24%, up a little from our last update.

• Among the early reporters for the S&P 500, the percent of companies beating consensus on EPS is up vs. last quarter, but the percent of companies beating revenues is down.

• The rate of upward EPS estimate revisions for the S&P 500 has slipped a little, but what’s surprised us is that this stat has moved up again for the index’s top-10 market cap names and the softness has been driven by the other 490 names in the index.

• Geographically, we’re still seeing some improvement in European EPS estimate revisions and Canada and Japan are also now trending higher on this stat, which has supported the geographical broadening trade.

And wrapping up with Takeaway #3: Why we’re on guard for a shift back to mega cap Growth in the style trade’s ongoing tug of war.

• On higher-level positioning trades, we indicated in our mid-year outlook update two weeks ago that the broadening trade (the outperformance of non-US equities over US equities and Value over Growth) probably had some room to run based on what we were seeing in our valuation work, but that we still thought of these as trades rather than longer-term shifts in leadership given better earnings dynamics for mega cap Growth and a lack of follow-through for the broadening on funds flows.

• Our valuation work isn’t yet sending a clear reversal signal. But given the sideways move in US/non-US performance that has emerged plus the return of Growth/Value, high price momentum/low price momentum, and top 10/rest of S&P 500 relative performance trends to levels close to past inflection points, we are on guard for a shift back into traditional mega cap Growth leadership. These are areas where we’ve seen the pivot before.

• Earnings season also presents an opportunity for investors to refocus on the better EPS story coming out of the AI theme and Mag 7 that remains embedded in consensus forecasts for 2026-2028.

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