Morgan Stanley Expects Earnings Growth Outside the Tech Sector. What to Buy Ahead of Earnings Season?

Morgan Stanley strategists believe that U.S. stocks outside the circle of tech giants may post strong financial results this earnings season. They believe such results could extend the market rally beyond the tech sector, according to Bloomberg. Here’s what analysts at Morgan Stanley, as well as experts from other major Wall Street investment banks, recommend keeping an eye on ahead of the start of the corporate earnings season.

According to Morgan Stanley’s estimates, the median company in the S&P 1500 composite index—which combines large-, mid-, and small-cap stocks on the U.S. stock market (collectively, the 1,500 largest U.S. public companies)— will post earnings per share (EPS) growth of more than 10% for the second quarter—a pace that could be the strongest since the economy began recovering from the pandemic, Bloomberg notes. Overall, the S&P 1500 accounts for about 90% of the total market capitalization of the U.S. stock market.

Against this backdrop, Morgan Stanley expects the rally in U.S. stocks to continue—and to extend beyond the technology sector “thanks to the resilience of median stock earnings.”

In this regard, analysts continue to raise their earnings forecasts for the transportation sector and the cyclical consumer goods segment, both of which are closely tied to economic growth, Bloomberg notes.

The second-quarter corporate earnings season kicks off on Tuesday, July 14, with the release of financial results from the largest banks.

According to analysts, technology companies will once again be the focus of attention during this earnings season.

— Despite the volatility of recent weeks, RBC Capital Markets strategist Lori Calvasina raised her rating on tech sector stocks to “Overweight” (equivalent to a “buy” recommendation), citing an active upward revision of forecasts for both revenue and earnings, as well as a resumption of capital inflows into funds. “Admittedly, valuations in the technology sector are not cheap, but according to our latest review, the sector is only slightly above its long-term average in terms of the median absolute and relative P/E ratios [the ratio of share price to earnings per share],” Kalvasina notes.

— Bank of America analysts, for their part, are recommending that investors focus on companies in the technology, financial, hospitality, and consumer sectors ahead of the earnings season. Their assessment was published by CNBC on July 11. Among the most interesting stocks, they specifically mentioned shares of the streaming service Spotify, IT giant IBM, Deutsche Bank, as well as shares of IHG (InterContinental Hotels Group), which manages major international hotel chains, and shares of Grab, the Singapore-based super app for taxi booking and food delivery. According to BofA, all of these companies are “better prepared than the rest for the release of their quarterly earnings reports,” the TV channel noted.

Overall, Wall Street analysts expect earnings for companies in the S&P 500 to jump 23% this earnings season, according to data compiled by Bloomberg Intelligence. This figure could be one of the best results on record, excluding periods of economic recovery following major recessions, the agency reports.

This sets a high bar for stock indices trading near their all-time highs, notes Bloomberg (the S&P 500 is 1% below its all-time high; the Nasdaq 100 is 3.3% below; the Dow Jones is down 1.2%). Market participants are also awaiting announcements from companies that are spending massive amounts on AI infrastructure—the so-called hyperscalers, the agency reports. This group has largely missed out on the S&P 500’s rally this year due to concerns that massive capital expenditures may not pay off. For example, the Roundhill Magnificent Seven ETF—which tracks the performance of big-tech stocks—has gained just under 2% year-to-date, while the S&P 500 has gained 10.6% over the same period. However, the broad U.S. stock index itself—for the first time since 2022—is outperforming the S&P 500 balanced index, which smooths out the impact of tech giants on the stock market, Bloomberg notes, — it has risen 11.84% since the start of the year.

This article was AI-translated and verified by a human editor