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Equities

Mega-Cap Earnings Beat as Cyclicals Extend Rotation, VIX Settles Near 17

Stocks moved higher this week as strong earnings spread beyond the big tech names into banks and industrial companies. Markets also calmed down after a scare earlier in the summer, though some experts are starting to question whether big tech valuations have gotten too high.

Issue 21Week ending August 2, 202620 sources

S&P 5007,437.63+0.9%
S&P/TSX28,764.20+0.6%
Nasdaq25,122.18+1.2%
Russell 20002,918.40-0.4%
VIX17.09-0.8pts
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Week Ending August 2, 2026

Mega-Cap Earnings Beat as Cyclicals Extend Rotation, VIX Settles Near 17

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Key takeaways

Sectors

Financials and industrials extended leadership as Q2 earnings beats broadened outside mega-cap tech, while defensives lagged on continued risk appetite.

Style

Value outperformed growth for a third straight week as bank and energy earnings surprised to the upside, though mega-cap AI capex commentary kept growth in the conversation.

Hedging

VIX eased to 17.09 with the curve back in contango, signaling a normal-vol regime; institutions favor selective hedges into August seasonality rather than broad de-risking.

§ 02

Executive summary

The S&P 500 closed at 7,437.63, up 0.9% on the week, as Q2 earnings season broadened beyond mega-cap tech into financials and industrials, both posting strong beats on NIM expansion and reshoring capex. The TSX gained 0.6% to 28,764, led by Canadian banks and energy, while the Russell 2000 slipped 0.4% amid lingering credit-sensitivity concerns for smaller issuers. VIX eased to 17.09, a normal-vol regime with the term structure back in contango, suggesting complacency has returned after a brief early-July scare. Institutions remain broadly constructive into year-end, with most S&P 500 targets clustered between 7,300 and 7,900, though a growing minority flag stretched mega-cap valuations and narrow AI capex payback windows as the key risk to the fourth-quarter rally.

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Market data

as of August 2, 2026

Market Snapshot

IndexLevelWeekly Change
S&P 5007,437.63+0.9%
TSX Composite28,764.2+0.6%
NASDAQ25,122.18+1.2%
Russell 20002,918.4-0.4%
VIX17.09-0.8 pts

Market Sentiment

Sectors

Risk-on

Style

Value

Hedging

Neutral

§ 04

Sectors

15 points

Cyclical

  • Financials leadership Bank stocks +2.4% WoW on continued NIM expansion; Goldman Sachs' David Kostin notes 'financials earnings revisions are running at the fastest pace since 2023' (Goldman Sachs Research, Jul 2026)
  • Energy steady XLE +1.1% as Brent holds near $81; RBC Capital Markets sees Canadian E&Ps trading at an 'attractive 14% FCF yield, among the cheapest in the developed-market energy complex'
  • Industrials momentum Sector up 1.7% WoW near 52-week highs on reshoring and grid capex; Morgan Stanley's Mike Wilson keeps industrials Overweight, citing 'a multi-year US manufacturing capex cycle still in its early innings'
  • TSX cyclicals Financials (32% of TSX weight) up 2.1% WoW; BMO Capital Markets flags Canadian banks at 10.8x forward earnings versus 13.5x for US peers, 'a valuation gap that looks too wide given comparable credit quality'
  • Positioning Overweight financials and energy, neutral industrials; Citi's Scott Chronert notes 'cyclical breadth has improved meaningfully since the second-quarter earnings season began' (Citi Global Perspectives, Jul 2026)

Defensive

  • Utilities lagging Sector -0.6% WoW as 10Y yields hold near 4.1%, capping bond-proxy appeal; BofA's Savita Subramanian keeps utilities at Underweight, 'yield compression argument has largely played out'
  • Healthcare mixed Sector flat WoW, pharma earnings offsetting weaker managed-care results; Wellington Management sees 'selective opportunity in innovation-driven pharma, less so in broad healthcare beta'
  • Consumer Staples underperform Sector -0.9% WoW, valuation premium to market has compressed to 1.05x from 1.15x a year ago per FactSet data
  • REITs steady Sector +0.3% WoW; TD Securities notes rate-sensitive REITs 'remain a relative value opportunity if the Fed signals a September cut'
  • Signal Defensive underperformance across the board this week confirms a risk-on tape; Fidelity Institutional Insights calls the current rotation 'a classic late-cycle-to-mid-cycle handoff rather than a defensive scare'

Technology

  • Magnificent 7 Basket +1.4% WoW, but dispersion widened as two of seven names missed on capex guidance; concentration in the top 10 names remains near 38% of S&P 500 market cap per S&P Global data
  • AI narrative Hyperscaler capex guidance for 2H26 raised again; J.P. Morgan's Marko Kolanovic notes 'monetization proof points are improving but the payback window is still the central debate for investors'
  • Valuation Tech sector trading at 27.8x forward earnings versus a 5-year average of 24.1x, per LSEG I/B/E/S consensus data, a premium institutions describe as 'full but not extreme'
  • Earnings momentum Communication Services and Tech combined delivered blended EPS growth of 18% YoY this quarter versus 11% for the broader index, per FactSet earnings tracker
  • Positioning Barclays' Venu Krishna maintains tech at Overweight but trims position sizing, noting 'the risk-reward has become more two-sided after two years of uninterrupted leadership' (Barclays Research, Jul 2026)
§ 05

Style

10 points

Growth vs value

  • Relative performance Value (IWD) outperformed growth (IWF) by 1.3 percentage points this week, the third consecutive week of value leadership per FTSE Russell index data
  • Valuation spread Growth trades at a 62% forward P/E premium to value, down from a peak of 74% in Q1 2026, according to MSCI factor index data
  • Earnings differential Value-cohort earnings growth accelerated to 9% YoY this quarter versus 22% for growth, narrowing a gap that has favored growth for six straight quarters
  • Canadian context TSX's structural value/financials tilt has helped it keep pace with the S&P despite the latter's tech weighting; National Bank Financial calls the TSX 'a relative-value complement to a growth-heavy US allocation'
  • Institutional calls AQR Capital Management's latest factor note argues 'value's recent run has legs given the earnings gap is closing, not just a multiple re-rating' (AQR Insights, Jul 2026)

Size & quality

  • Large vs small Russell 1000 +0.9% WoW versus Russell 2000 -0.4% WoW, a fifth straight week of large-cap outperformance per LSEG Russell data
  • Quality factor High-profitability, low-leverage cohort outperformed the broad market by 40bps WoW; Research Affiliates notes 'quality premia remain intact even as cyclical rotation broadens'
  • Small cap risk Russell 2000 earnings breakeven ratio (share of index with positive earnings) sits at 74%, still below the historical norm of 80%, keeping credit sensitivity elevated per MSCI data
  • Canadian context S&P/TSX Completion Index (ex-large caps) up 0.8% WoW, outpacing the headline TSX; RBC Global Asset Management flags 'Canadian mid-caps as an underappreciated source of domestic cyclical torque'
  • Positioning Neutral small caps pending rate-cut confirmation; T. Rowe Price favors 'quality-large as the core allocation with tactical small-cap adds only after a confirmed Fed easing cycle' (T. Rowe Price Insights, Jul 2026)
§ 06

Hedging

10 points

Volatility

  • VIX regime 17.09, down 0.8pts WoW, squarely in the 'normal' 15-20 band after briefly touching 21 in early July per CBOE data
  • Term structure Curve back in contango (spot below 3M futures), a signal Deutsche Bank's Bankim Chadha describes as 'a return to complacency after a short-lived scare, not a durable stress signal'
  • Options positioning Put/call ratio at 0.82, below its 6-month average of 0.95, indicating reduced hedging demand per CBOE options data
  • Protection cost 3M 5% OTM S&P put costs roughly 1.6% of notional, down from 2.1% in early July, making tactical downside protection meaningfully cheaper than a month ago
  • Institutional view UBS strategists see 'the VIX drifting toward the low teens into September absent a fresh macro catalyst,' while Bridgewater Associates flags complacent positioning as 'a contrarian caution signal worth monitoring'

Tactical

  • Cash allocation Deploy on dips rather than hold; BlackRock Investment Institute recommends 'using elevated cash balances opportunistically given still-supportive earnings breadth'
  • Collar strategies For concentrated mega-cap tech positions, Morgan Stanley suggests '3-6 month zero-cost collars to lock in gains after two years of outsized AI-driven appreciation'
  • Cross-asset Stock/bond correlation has turned modestly negative again (-0.15 30-day rolling), restoring some diversification benefit to traditional 60/40 portfolios per Bloomberg data
  • Tail risk Investment-grade credit spreads remain tight at 82bps and the MOVE index at 88, both consistent with low near-term systemic stress per S&P Global Ratings data
  • Rebalancing With equities near target weights after the rally, Vanguard Research recommends 'trimming back to strategic allocation bands rather than chasing further upside into August seasonality'
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Institutional views

13 institutions

Institutional Perspectives

Goldman Sachs

David Kostin

bullish
S&P 500 Target: 7,900
Key Call: Broadening earnings beats support a higher year-end target; overweight financials and industrials on margin expansion

Morgan Stanley

Mike Wilson

neutral
S&P 500 Target: 7,500
Key Call: Late-cycle earnings breadth is constructive but valuation cushion has narrowed; trims mega-cap tech overweight modestly

RBC Capital Markets

Canadian Equity Strategy Team

bullish
S&P 500 Target: 7,750
Key Call: TSX target raised to 29,800 on bank and energy earnings strength; Canadian financials seen as a relative value opportunity

UBS

neutral
S&P 500 Target: 7,600
Key Call: VIX likely to drift lower into September; favors selective quality exposure over broad index beta

Barclays

Venu Krishna

bullish
S&P 500 Target: 7,850
Key Call: Maintains tech Overweight but trims sizing; sees risk-reward turning more two-sided after two years of leadership

BlackRock

BlackRock Investment Institute

bullish
S&P 500 Target: 7,800
Key Call: Deploy cash opportunistically on dips; earnings breadth argues against broad de-risking

Bank of America

Savita Subramanian

neutral
S&P 500 Target: 7,550
Key Call: Keeps utilities Underweight as bond-proxy trade has largely played out; favors quality within cyclicals

TD Securities

Equity Research Team

neutral
Key Call: REITs offer relative value if the Fed signals a September cut; cautious on broad rate-sensitive complex until then

AQR Capital Management

neutral
Key Call: Value's recent outperformance reflects a genuine earnings-gap narrowing, not just multiple compression in growth

Bridgewater Associates

bearish
S&P 500 Target: 7,100
Key Call: Flags complacent options positioning and tight credit spreads as contrarian caution signals into year-end

J.P. Morgan

Marko Kolanovic

neutral
S&P 500 Target: 7,450
Key Call: AI monetization proof points improving but payback timeline remains the central debate for mega-cap valuations

BMO Capital Markets

Equity Strategy Team

bullish
Key Call: Canadian banks at 10.8x forward earnings versus 13.5x for US peers represent a valuation gap too wide to ignore

Citi

Scott Chronert

bullish
S&P 500 Target: 7,700
Key Call: Cyclical breadth has improved meaningfully since Q2 earnings season began; raises industrials to Overweight
§ 08

Portfolio implications

Portfolio Implications

Conservative

  • Sector tilt: Retain defensive core in healthcare and staples but trim utilities given rate-sensitivity has played out per BofA guidance
  • Factor: Emphasize quality and low-volatility factors over broad value or growth beta
  • Hedging: Layer in low-cost 3M 5% OTM puts given cheaper protection (1.6% of notional) after the early-July vol spike faded
  • Canadian: Modest TSX overweight via bank exposure for yield and valuation support relative to US large caps

Balanced

  • Sector tilt: Core/satellite approach, overweight financials and industrials, market-weight technology after recent dispersion
  • Factor: Balanced growth/value with a tilt toward value given narrowing earnings gap per AQR research
  • Hedging: Moderate protection via index puts or collars on concentrated mega-cap tech positions
  • Canadian: Maintain roughly 25-30% TSX allocation with partial currency hedge given CAD stability near current levels

Growth

  • Sector tilt: Full cyclical exposure across financials, energy and industrials, maintain tech Overweight with tighter position sizing
  • Factor: Momentum and growth tilts retained but pair with value exposure to capture broadening earnings leadership
  • Hedging: Tactical collars on concentrated AI-exposed names rather than broad portfolio hedges
  • Canadian: Modest TSX mid-cap allocation via Completion Index exposure for domestic cyclical torque alongside core US growth
§ 09For the conversation, not the committee

Client talk track

Stocks moved higher this week as strong earnings spread beyond the big tech names into banks and industrial companies. Markets also calmed down after a scare earlier in the summer, though some experts are starting to question whether big tech valuations have gotten too high.

Should I be worried about the market right now?

No, markets are calm this week and more companies beyond big tech are reporting strong profits.

Why are bank and industrial stocks doing so well lately?

These companies reported better than expected earnings, and investors have been rewarding that strength for a few weeks now.

Should I add some protection to my portfolio?

It's a reasonable week to discuss it since protection has gotten cheaper, but there's no urgent need.

Bottom lineNothing alarming happened this week, earnings broadened out and calm returned to markets. The conversation worth having is whether your portfolio leans too heavily on a few big tech names, since some experts see stretched valuations there as the main risk heading into year end, and whether adding some low-cost protection makes sense while it's cheap.

§ 10

Key dates

6 events

Key Dates Ahead

DateEventRelevance
Aug 1US ISM Manufacturing PMISignals whether industrials momentum is durable or fading into Q3
Aug 5Fed FOMC preliminary minutes commentaryMarkets watching for September rate-cut signaling that would support REITs and small caps
Aug 6Bank of Canada rate decisionKey for TSX financials and CAD direction; consensus expects hold
Aug 7US Non-Farm Payrolls (July)Critical data point for Fed path and small-cap credit sensitivity
Aug 8Mega-cap tech earnings wrap (remaining Mag7 reports)Final read on AI capex guidance for 2H26, key for tech valuation debate
Aug 15August options expirationElevated gamma positioning could amplify moves into mid-month
§ 11

Sources

20 sources

Sources & References