The Q3 earnings outlook has been steadily improving since the start of the quarter, driven mostly by a better-than-expected economic recovery. This is especially true as S&P 500 earnings are expected to decline 22.8% on 2.9% lower revenues. The earnings projection reflects an improvement from the 26.5% earnings decline expected at the start of July and follows the 32.4% earnings drop in Q2 when economic and business activities came to a halt as a result of the pandemic-driven lockdowns.

Of the 16 Zacks sectors, 14 are expected to experience earnings declines. The two sectors that are expected to lose most money in Q3 (year-over-year declines of 100% or more) are transportation (122.5%) and energy (102.2%). Construction and medical are the only sectors with respective earnings growth expectation of 11.5% and 0.6% relative to the year-ago period. Also, utilities and technology are expected to see a modest decline of 3.4% and 4%, respectively (read: ETFs to Gain as U.S. New Home Sales Hit 14-Year High).

Given this, we have highlighted one ETF and one stock from these four sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

For stocks, we have added the extra criteria of a VGM Score of B or better and a positive Earnings ESP. The combination of a Zacks Rank #3 or better and a positive ESP increases the odds of an earnings beat by 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Construction

This sector has gained momentum from homebuilders, which has emerged strongly from the COVID-19 pandemic. Tumbling mortgage rates and higher demand for new homes are driving homebuilders higher. This is because record-low mortgage