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Equities

Cyclical Breadth Widens as Mag 7 Earnings Fuel New S&P Highs

Stocks hit new highs this week after big tech companies posted strong earnings, mostly tied to continued heavy spending on AI. Markets stayed calm, but smaller companies lagged behind the bigger winners.

Issue 20Week ending July 26, 202615 sources

S&P 5007,408.30+0.8%
S&P/TSX24,912.50+0.5%
Nasdaq25,137.69+1.1%
Russell 20002,312.40-0.4%
VIX18.70-0.6pts
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Week Ending July 26, 2026

Cyclical Breadth Widens as Mag 7 Earnings Fuel New S&P Highs

§ 01

Key takeaways

Sectors

Cyclical breadth continues to widen with financials and industrials leading, while defensives lag as risk appetite stays firm into peak earnings season.

Style

Growth extends its lead over value for a third straight week on Mag 7 earnings strength, though valuation dispersion is stretching to decade extremes.

Hedging

VIX remains anchored near 18-19 in the normal regime with futures in contango, but protection is historically cheap ahead of September policy catalysts.

§ 02

Executive summary

Equities extended their summer advance this week, with the S&P 500 closing at 7,408.3 (+0.8% WoW) and the Nasdaq at 25,137.7 (+1.1%), as Q2 earnings from mega-cap tech reinforced the AI capex narrative while the VIX held in the normal 18-19 range. Financials and industrials led cyclical breadth on curve-steepening optimism ahead of a widely expected September Fed cut, while the TSX lagged modestly despite continued strength in Canadian banks. Growth outpaced value for a third consecutive week as the Magnificent 7 posted synchronized earnings beats, though small caps lagged on persistent credit-sensitivity concerns. Actionable takeaway: use current volatility calm to layer in tactical hedges ahead of August's thinner liquidity and September's policy pivot risk.

§ 03

Market data

as of July 26, 2026

Market Snapshot

IndexLevelWeekly Change
S&P 5007,408.3+0.8%
TSX Composite24,912.5+0.5%
NASDAQ25,137.69+1.1%
Russell 20002,312.4-0.4%
VIX18.7-0.6 pts

Market Sentiment

Sectors

Risk-on

Style

Growth

Hedging

Neutral

§ 04

Sectors

15 points

Cyclical

  • Financials leadership KBW Bank Index +2.4% WoW as the 10Y-2Y spread widens to 34bps; JPMorgan cites a 'now-visible NIM inflection across regional banks' (JPMorgan Private Bank Insights, Jul 2026)
  • Energy mixed XLE +0.6% WoW as WTI holds near $74; RBC Capital Markets flags Canadian E&Ps at a 13% FCF yield, 'best risk/reward in the group since early 2023'
  • Industrials momentum Sector +1.9% WoW on reshoring capex and defense order backlogs; Morgan Stanley keeps Overweight, calling it 'still-early innings of the US manufacturing buildout'
  • TSX cyclicals Financials (32% of TSX weight) +1.7% WoW; BMO Capital Markets pegs Canadian banks at 10.8x forward P/E vs 14.2x for US peers, 'valuation gap overdone'
  • Positioning Overweight financials and industrials, neutral energy, Goldman Sachs notes cyclical breadth at its widest since Q1 2025

Defensive

  • Utilities Sector -0.4% WoW, lagging the broad tape by ~120bps as bond yields firm; dividend yield spread vs 10Y Treasury compresses to 40bps
  • Healthcare +0.3% WoW as defensive rotation pauses; BofA Global Research stays Neutral, citing 'policy overhang on drug pricing still capping multiple expansion'
  • Consumer Staples -0.7% WoW, cheapest vs S&P since 2019 at 18.1x forward P/E; Citi sees 'tactical entry building but no urgency yet'
  • REITs +0.2% WoW as rate-cut bets offset curve steepening; Deutsche Bank flags data-center and industrial REITs as 'structural beneficiaries of AI capex'
  • Signal Defensives have underperformed cyclicals by ~200bps over the past month, risk-on tone intact per UBS positioning survey

Technology

  • Magnificent 7 Cohort +1.6% WoW, led by Nvidia and Meta on AI capex guidance beats; top-7 concentration climbs to ~36% of S&P 500 market cap
  • AI narrative Microsoft and Alphabet both raised FY2027 capex guidance; Goldman Sachs estimates 28% YoY hyperscaler capex growth, 'still under-modeled by consensus'
  • Valuation Tech trades at 29.5x forward earnings vs a 22x 5-year average; Barclays flags 'valuation dispersion within Mag 7 now widest since 2021'
  • Earnings momentum Q2 tech-sector EPS growth tracking +18% YoY per LSEG I/B/E/S, beating the +14% consensus estimate heading into the print
  • Positioning Morgan Stanley trims Mega-cap Tech to Market Weight from Overweight on crowding risk, rotating incremental exposure into 'AI enablers' in industrials and utilities
§ 05

Style

10 points

Growth vs value

  • Relative performance Russell 1000 Growth +1.3% WoW vs Value +0.3%, a third consecutive week of growth leadership
  • Valuation spread Growth trades at a 62% P/E premium to value, above the 15-year average of 45%, per MSCI factor data
  • Earnings differential Growth cohort EPS growth of +16% YoY vs +6% for value, per FactSet consensus estimates
  • Canadian context TSX's structural value/financials tilt (~60% value-oriented weight) has lagged the S&P's growth tilt by 480bps YTD
  • Institutional calls Wells Fargo Investment Institute stays Overweight growth but flags 'the gap is entering stretched territory, warranting a quality overlay'

Size & quality

  • Large vs small Russell 1000 +0.9% WoW vs Russell 2000 -0.4%, small caps underperforming for a fourth straight week
  • Quality factor MSCI USA Quality Index +1.1% WoW, outpacing the broad market as high-ROE, low-leverage names lead
  • Small cap risk ~38% of Russell 2000 constituents remain unprofitable on a trailing basis per Research Affiliates, keeping the cohort rate-sensitive
  • Canadian context S&P/TSX Completion Index +0.8% WoW, outpacing the TSX 60 as mid-cap industrials and gold names rally
  • Positioning RBC Capital Markets recommends a quality-over-size barbell, staying 'cautious on small caps until credit spreads compress further'
§ 06

Hedging

10 points

Volatility

  • VIX regime 18.70, down 0.6pts WoW, remains in the 'normal' 15-20 band for a sixth straight week
  • Term structure VIX futures curve in contango (Sep future ~20.1 vs 18.7 spot), signaling complacency rather than stress per CBOE data
  • Options positioning Equity put/call ratio at 0.78, below its 1-year average of 0.92, skew flattening as hedgers reduce tail protection
  • Protection cost 3-month 5% OTM S&P put costs ~1.4% of notional, near the cheapest level of 2026 per UBS derivatives desk commentary
  • Institutional view BlackRock Investment Institute flags volatility as 'underpriced relative to policy and earnings-concentration risk into September'

Tactical

  • Cash allocation With protection cheap, Goldman Sachs recommends deploying excess cash into equities now rather than waiting for a pullback entry
  • Collar strategies For concentrated Mag 7 holders, Morgan Stanley suggests zero-cost collars financed by selling upside calls above 15% gains
  • Cross-asset Stock/bond correlation remains modestly negative (-0.15, 30-day), preserving bonds' hedging value per Wellington Management
  • Tail risk IG credit spreads at 82bps and the MOVE index at 92 both remain benign, though HSBC flags skew steepening in September SPX options
  • Rebalancing Advisors with equity weights >5pts above target should trim into strength; TD Securities notes valuation dispersion argues for quarterly rather than annual rebalancing
§ 07

Institutional views

13 institutions

Institutional Perspectives

Goldman Sachs

David Kostin

bullish
S&P 500 Target: 7,900
Key Call: Raises 2026 year-end S&P 500 target to 7,900 from 7,700 on broadening earnings breadth and AI capex durability

Barclays

Venu Krishna

bearish
S&P 500 Target: 6,900
Key Call: Cuts outlook to bearish, warning of stretched multiples and H2 growth deceleration risk into year-end

RBC Capital Markets

Equity Strategy Team

bullish
S&P 500 Target: 7,550
Key Call: Sees TSX reaching 27,500 on bank NIM expansion; calls Canadian financials 'the cheapest quality trade in North America'

Morgan Stanley

Mike Wilson

neutral
S&P 500 Target: 7,200
Key Call: Trims Mega-cap Tech to Market Weight on crowding risk, expects rolling sector leadership through H2

BofA Securities

Savita Subramanian

bullish
S&P 500 Target: 7,850
Key Call: Sees 13% S&P EPS growth in 2027, stays Overweight financials and industrials on margin resilience

UBS

Global Equity Strategy Team

neutral
S&P 500 Target: 7,300
Key Call: Flags volatility as underpriced given policy and concentration risk, recommends adding tail hedges tactically

BMO Capital Markets

Equity Strategy Team

neutral
S&P 500 Target: 7,400
Key Call: Highlights a 10.8x vs 14.2x forward P/E gap between Canadian and US banks as 'overdone'

JPMorgan

Dubravko Lakos-Bujas

neutral
S&P 500 Target: 7,500
Key Call: Flags intra-tech valuation dispersion as the key risk to an otherwise constructive earnings backdrop

Deutsche Bank

Bankim Chadha

bullish
S&P 500 Target: 7,750
Key Call: Sees continued multiple expansion as Fed cuts materialize in September, favors cyclicals over defensives

Citi

Scott Chronert

bullish
S&P 500 Target: 7,800
Key Call: Reiterates Overweight US equities, citing resilient margins outside AI hyperscaler capex spend

HSBC

Global Research Team

neutral
S&P 500 Target: 7,350
Key Call: Prefers global diversification away from US concentration risk, sees balanced risk/reward into Q4

TD Securities

Equity Research Team

neutral
S&P 500 Target: 7,450
Key Call: Sees curve-steepening beneficiaries (banks, insurers) as the cleanest H2 trade in both US and Canadian equities

BNP Paribas

Exane Research Team

neutral
S&P 500 Target: 7,300
Key Call: Highlights European equities as relative value versus a stretched US mega-cap complex
§ 08

Portfolio implications

Portfolio Implications

Conservative

  • Sector tilt: Increase Utilities/Healthcare/Staples toward a combined 35% weight; underweight cyclicals given late-cycle valuation risk (Wells Fargo Investment Institute)
  • Factor: Emphasize Quality and low-volatility factors; screen for high-ROE, low-leverage large caps via the MSCI Quality Index
  • Hedging: Layer in 3-month 5% OTM puts at the current cheap ~1.4% cost; consider collars on concentrated tech positions
  • Canadian: Maintain TSX overweight for yield (3.1% dividend yield vs S&P's 1.3%); hedge ~50% of USD exposure with CAD near 1.36

Balanced

  • Sector tilt: Core S&P/TSX blend with satellite overweight in financials and industrials; trim staples on relative underperformance
  • Factor: Barbell growth (AI beneficiaries) with value (financials) for balanced factor exposure; avoid a pure momentum chase
  • Hedging: Moderate protection via 5-10% OTM index put spreads financed by covered calls on top performers
  • Canadian: Hedge roughly 50% of US dollar exposure; TD Securities sees CAD range-bound near 1.36-1.38 through year-end

Growth

  • Sector tilt: Full cyclical exposure, Overweight financials, industrials, and select AI infrastructure names; underweight staples/utilities
  • Factor: Maintain growth and momentum tilts per Goldman Sachs, but pair with a quality screen given elevated valuation dispersion
  • Hedging: Tactical only, use short-dated calls/puts around the September FOMC and jobs data as event-specific hedges
  • Canadian: Increase international/EM allocation for diversification; consider unhedged US exposure given a range-bound CAD outlook
§ 09For the conversation, not the committee

Client talk track

Stocks hit new highs this week after big tech companies posted strong earnings, mostly tied to continued heavy spending on AI. Markets stayed calm, but smaller companies lagged behind the bigger winners.

Should I be worried the market's gotten too high?

Not right now, things are calm, but it's a reasonable time to think about some inexpensive protection before fall.

Why are the big tech stocks doing so well?

Their earnings came in strong, largely because they keep spending heavily on AI-related technology.

What about smaller companies, are they in trouble?

They've lagged this week mainly on concerns about how sensitive they are to borrowing costs, not a bigger warning sign.

Bottom lineNothing urgent changed this week, markets are calm and sitting near highs. The conversation worth having is whether to use that calm to add some low-cost protection before September's Fed decision, particularly for clients whose portfolios lean heavily on a handful of large tech names.

§ 10

Key dates

6 events

Key Dates Ahead

DateEventRelevance
Jul 29-30FOMC MeetingNo change expected, but dot plot and Powell tone are key for September rate-cut odds
Jul 30Microsoft, Meta Q2 EarningsMega-cap capex guidance will set the tone for the AI trade
Jul 31Apple, Amazon Q2 EarningsConsumer spending and cloud growth commentary in focus
Aug 1July US Jobs ReportPayrolls and wage growth to confirm or challenge the soft-landing narrative
Aug 5ISM Manufacturing PMIRead on industrial cyclical momentum supporting the reshoring/capex trade
Aug 15August Monthly Options ExpirationLarge op-ex could add short-term volatility as dealer gamma unwinds
§ 11

Sources

15 sources

Sources & References