The Q2 earnings season is all but finished, and the Q3 is fast approaching. This means it's time to focus on which sectors and companies are in the best position to deliver outperformance and higher share prices. The latest data from FactSet is telling and suggests another mixed season is upon us. 

Starting at the top, the consensus estimate for the 3rd quarter bounced from a low in early September and is hovering above 0.0%. The latest figure is 0.5% earnings growth, which is significant for 2 reasons. The 1st is that the S&P 500 (NYSEARCA: SPY) is exiting its earnings trough, which is a tailwind for the market. The 2nd is that the final tally for Q3 earnings growth will likely be higher than now.

The S&P 500 index tends to outperform its estimates 100% of the time, and strength over the past few quarters has run in the mid-single digits range. That trend should continue. In that scenario, the S&P 500 market will have a tailwind to support it and outperformance to lead it higher, but not all sectors will post strength. 

Communications Services Is the Hot Sector For Q3

The Communications Services sector will be the hot sector this quarter, but even it will post mixed results on a business-to-business basis. The sector is expected to grow by 32% compared to last year, and the estimates are rising. The consensus figure is up 700 basis points over the past 2 months, with significant strength in FAANG names. 

Names like Meta Platforms (NASDAQ: META), Alphabet (NASDAQ: GOOG), and Netflix (NASDAQ: NFLX) are expected to post the largest gains and have seen the most significant revisions. Factoring them out of the equation greatly reduces the outcomes. Other names are expected to grow earnings at much slower high-single and low-double-digit paces.

Meta alone is expected to see its earnings more than double; Alphabet’s will grow about 35%, and the 2 stocks make up nearly 50% of the sector. On the other hand, Verizon (NYSE: VZ) and AT&T (NYSE: T) will see their earnings shrink. 

Consumer Discretionary Continues to Grow 

Despite signs of weakness in the retail world, the Consumer Discretionary Sector continues to grow. The sector is expected to post earnings growth near 21%, and the estimates are rising. The consensus figure is up 850 basis points since the start of the reporting period and will likely move higher. However, only a few companies drive the strength, such as Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA).

Amazon is the single largest member of the ETF at nearly 25%, and it is the #1 individual company regarding growth and upward revisions. The # 2 holding is Tesla, and it is also leading the sector regarding earnings growth and upward revisions. Other areas of strength include fast-food leader McDonald’s (NYSE: MCD) and off-price retailer TJX Companies (NYSE: TJX). Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) earnings are expected to decline but may come in better than expected.

Information Technology and AI Will Be Strong 

Information Technology will be the 5th fastest-growing sector, but it makes this list because it is the 3rd hottest sector regarding upward revisions. The analysts have upgraded the outlook by 380 basis points over the last few months, driven by strength in NVIDIA (NASDAQ: NVDA) and other AI powerhouses.

The top-10 holdings of this sector are a who’s-who of blue-chip technology leaders with a significant presence in AI. All of them should be expected to post strength. 

The Energy Sector Could Come to a Boil in Q3 

The Energy Sector is expected to post the largest YOY earnings decline, and the estimates are falling but setting the sector up for outperformance. The oil price has risen steadily throughout the quarter despite rising production from non-OPEC members.

That and the pace of demand growth should lead to solid results this quarter, a return to earnings growth soon, and another round of windfall profits, dividends, and share repurchases in 2024. The price of WTI, the Energy Sector SPDR, and many of the stocks within the group are firing Golden Crosses.