ETFs for the Next Leg of Earnings Expansion

The Q2 earnings season is already showing that growth is broadening out. These conditions are putting equal-weighted smart beta ETFs into sharp focus, and investors are taking notice. Earnings growth is broadening, with the S&P 500 on track for a strong 24% year-over-year earnings expansion in Q2. The 'S&P 493' catch-up is gaining momentum, with analysts expecting these stocks to outpace the Mag 7 in Q2. Equal-weighted ETFs are standing out as a way to mitigate tech/AI concentration risk and capture gains across broader market leaders. According to FactSet data, not only is earnings growth on track for 24% year over year in Q2, but the underlying fundamental strength is broadening across most corners of the market. Ten sectors are on track for positive earnings growth (healthcare being the exception), and all 11 sectors are expected to show revenue growth. Midway through July, about two-thirds of the S&P 500 are showing serious momentum, with stocks trading above their respective 50-day moving averages. A look at the Invesco S&P 500 Equal Weight ETF (RSP) versus the SPDR Portfolio S&P 500 ETF (SPYM) shows outperformance in the equal-weighted S&P 500 basket, confirming that broadening story. 'In aggregate, the Magnificent 7 companies have reported higher (year-over-year) earnings growth than the other 493 companies in the S&P 500 over the past several quarters,' John Butters at FactSet said. 'Is this trend expected to continue in Q2 2026? The answer is yes.' That said, the blended earnings Q2 growth rate (expected) for the other 493 companies in the S&P 500 is 22.8%, which, if it materializes, would be the highest year-over-year growth rate these companies have seen since late 2021. 'In fact, four of the five top contributors to earnings growth for the S&P 500 for Q2 2026 are not Magnificent 7 companies,' he noted. 'It is interesting to note that analysts expect higher earnings growth for the other 493 companies in the second half of 2026.' RSP has picked up $1.5 billion in net new money in July alone, bringing its year-to-date asset haul to more than $11 billion. The fund is currently among the 15 most popular ETFs of the year. RSP is a sort of poster child for the equal-weighted ETF category, but there are more than 150 equal-weighted ETFs with about $100 billion in assets spread across them. For example, the Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW) has delivered double-digit gains this year and is finding traction with investors worried about tech and AI-related concentration risk. At a sector level, the ALPS Equal Sector Weight ETF (EQL) equal-weights each sector in the portfolio at just under 10% allocation each. That’s a lot less tech exposure versus the 37% seen in the S&P 500, and a lot more materials, utilities, energy, and real estate exposure. Or the Invesco S&P 500 Equal Weight Technology ETF (RSPT) equal-weights the tech sector alone in a strategy that has more than $5 billion in total assets. The Invesco QQQ Equal Weight ETF (QEW) is another example of an equal-weighted approach to a popular benchmark: the Nasdaq 100 index, which benchmarks the Invesco QQQ ETF (QQQ). This past week, QEW’s performance just edged higher above QQQ’s year-to-date results. In QEW, tech is about 47% of the sector exposure versus nearly 69% in QQQ. While the top four holdings in QEW represent about 5% of the portfolio, in the Qs the top four stocks snag 25% of the mix, with Nvidia leading at 8%. Concentration risk is real.