U.S. Valuation Pullback Strengthens Case for Some Cyclical Sectors

The pullback in U.S. stock valuations since early summer has improved the investment backdrop for some cyclical industries, even as earnings growth remains strong and companies prepare to report third-quarter results.

The capital goods sector stands out among industries with the sharpest upward revisions to earnings estimates. Some asset-heavy sectors have also become more attractive after recent valuation declines.

The market’s advance has slowed since mid-August, as rising bond yields offset support from a strong earnings season. Companies are expected to begin reporting third-quarter results in the coming weeks.

S&P 500 companies are expected to post 25% year-over-year earnings growth for the third quarter, down from 34% in the second quarter. Artificial intelligence demand, record capital spending by cloud computing giants and a strong macroeconomic environment have supported earnings growth.