HSBC: Low Expectations in Unloved Sectors May Drive Broadening of U.S. Stock Rally
nashnova research
HSBC notes that S&P 500 Q3 earnings growth drops to just 5% once the Magnificent Seven and energy are stripped out, but that low bar may be exactly what lets overlooked sectors surprise to the upside and broaden the rally.
Nearly 30% earnings growth — who is actually delivering?
S&P 500 Q3 earnings growth is close to 30%, but it is heavily concentrated in semiconductors and energy.
Strip out the Magnificent Seven, the broader tech sector, and energy, and the remaining constituents are expected to grow earnings by just 5% — down sharply from 14% last quarter.
This means → the headline "high growth" is carried by a handful of mega-caps; most companies are actually decelerating.
What does "low expectations" really mean?
HSBC strategist Nicole Inui points out that only 5 of the S&P 500's 11 sectors are forecast to post Q3 earnings growth of 10% or more, down from 9 last quarter.
In plain terms = Wall Street's bar for most sectors is already very low — beating expectations only requires results that are "not as bad as feared."
This reflects a market where attention and capital are over-concentrated in top tech names, leaving everything else largely ignored.
Which unloved sectors could break out?
Inui names four areas: financials, consumer discretionary, utilities, and real estate — all currently out of favour.
Her logic: US economic activity keeps running above expectations → actual earnings in these sectors will likely beat already-lowered forecasts → capital rotates in, broadening market participation.
This means → if these sectors collectively surprise, the US rally shifts from "a few giants pulling the index" to "wider participation" — what Wall Street calls improving market breadth.
How much room does valuation leave?
The S&P 500 currently trades at roughly a 4% discount to its five-year average forward P/E, so it is not expensive in aggregate.
If lagging sectors beat on earnings, the scope for valuation re-rating — prices converging toward fair value — widens further.
In plain terms = low expectations + undemanding valuations + a resilient economy — HSBC sees these three conditions combining to open a window for the long-awaited sector rotation.
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