Investing.com -- According to analysts at RBC Capital, the early third-quarter earnings season is showing mixed results for the broader market but offers encouraging signs for the rotation trade.
While key growth sectors like Technology and Communication Services have maintained solid performance, RBC believes momentum appears to be shifting toward sectors such as Financials, Industrials, and Health Care.
"The headline stats are solid to be sure, but not quite as strong as one might expect given the strong move higher in the S&P 500 recently," RBC noted.
The bank explains that while 69% of companies have beaten revenue estimates—up from 61% in the second quarter—the percentage surpassing earnings per share (EPS) forecasts has dropped to 75% from 80% in Q2. This mixed performance hints at emerging challenges despite recent market gains.
RBC highlighted promising indicators for the rotation trade, with upward EPS estimate revisions favoring sectors outside of Mega Cap Growth names.
"The 2024 EPS growth rate implied by bottom-up consensus forecasts has ticked up for Financials," RBC reported, adding that 2025 forecasts have also improved for Health Care, Materials, and Industrials. Notably, Health Care now holds the highest anticipated EPS growth rate for 2025.
On a macroeconomic level, company commentary suggests that the “plumbing of the economy is in good shape, with a few clogs.”
RBC pointed out that many firms believe the economic backdrop continues “to emphasize resilience, steadiness, normalization, and a resilient but discerning consumer,” particularly within Financials.
However, some companies in more challenged industries noted ongoing difficulties, reinforcing known sector-specific issues.
RBC also noted optimism about the potential benefits of lower interest rates and flagged election-related uncertainty as a recurring theme across earnings calls. As the rotation trade gains traction, RBC sees signs that investors are beginning to move capital toward more cyclically oriented sectors, positioning themselves for future growth.