Originally Posted 15 August, 2025 – Takeaways from Earnings Season
Author: Bipan Rai, MBA
Top takeaways from earnings season: Where we see opportunity, where caution is warranted, and why we still favour a barbell approach to sector allocation.
- At the time we’re writing this, just over 70% of firms in the S&P 500 Index have reported earnings for the second quarter. Of those, close to 80% of them have beaten earnings-per-share (EPS) expectations – which is slightly above the five-year average of 78%.
- The strength in earnings has led to a meaningful revision higher in EPS estimates for the present quarter. For instance, expectations for fiscal year earnings for the S&P 500 have moved from US$264.48 at the end of Q2 to US$267.27 – an increase of 1.05% over that time (according to estimates provided by Bloomberg). That’s not bad considering the broader macro backdrop of tariffs and a decelerating U.S. economy.
- The uptick in optimism has been paced by strong earnings growth in sectors like Communications, Technology and Financials. Of course, that speaks to the performance of some of the larger names in each of those sectors.
- Which leads us to a bit of a conundrum: while we are constructive given the fundamentals, we are very cautious given present valuation as well as other factors (including seasonality and the trade backdrop).
- For instance, we continue to see upside in the Technology sector, but at over 32x price-to-forward-earnings, we’re likely to increase allocation only modestly. As another example, despite the increase in earnings expectations for this year, Health Care remains vulnerable given the adverse macro backdrop (including the possibility of pharmaceutical tariffs being levied by the U.S.).
- In our minds, we continue to like the barbell approach to sector allocation. We’ll pair overweight positions in pro-cyclical sectors like Tech, Communications Services and Financials with Utilities (a traditionally defensive sector).
- We’re cutting back on our exposure to Materials and Real Estate. The former is too vulnerable to the shift in the trade regime which is why we are downgrading it to an underweight position. The latter should benefit as the Federal Reserve re-starts its easing cycle this fall, but sustained performance will need the economic cycle to turn first.
Sectors We are Overweight:
- Utilities BMO SPDR Utilities Select Sector Index ETF – ZXLU
- Communications BMO SPDR Communication Services Select Sector Index ETF – ZXLC
- Tech BMO SPDR Technology Select Sector Index ETF – ZXLK
- Utilities BMO SPDR Utilities Select Sector Index ETF – ZXLU
Change in Earnings Expectations for 2025 by Sector (YoY %)
Past performance is not indicative of future results.
Returns by Sector
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Earnings and Valuation
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Seasonality Chart (Average Rank Over Past 35 Years)
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BMO GAM Quant Model
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