Morgan Stanley is advising investors to maintain their focus on cyclical stocks as earnings season unfolds, with results in this sector consistently surpassing expectations. According to the bank’s analysts, cyclical stocks—those that follow the broader economic cycle—are demonstrating robust performance, indicating that companies yet to report earnings may also post significant beats.
Cyclicals, which include industrials, financials, and energy stocks, tend to rise and fall in line with economic growth, distinguishing them from defensive stocks such as consumer staples, utilities, and healthcare, which perform more steadily regardless of economic conditions. The analysts, led by Mike Wilson, Morgan Stanley’s chief investment officer, point to a “lower earnings bar” as a key factor for the sector’s current success.
Third-quarter earnings-per-share (EPS) estimates had been revised down by 4% in the lead-up to earnings season, primarily due to challenges in cyclical industries. However, financial stocks, in particular, have exceeded these lowered expectations, signaling that other cyclical sectors could follow suit.
“The bar has been lowered into earnings season for cyclical pockets, and stocks are being rewarded for clearing that lowered bar—financials were the first to show this, and sectors such as capital goods and consumer services could follow,” the analysts wrote.
Morgan Stanley highlighted that 92% of large-cap banks under their coverage have beaten estimates on operating EPS, with all of them exceeding revenue forecasts. As a result, financial stocks have outpaced the broader S&P 500, rising 5.6% in the past two weeks, compared to the index’s 3% gain over the same period.
Earlier in October, Morgan Stanley upgraded financials to an “overweight” rating due to improving economic conditions, increased capital markets activity, and favorable relative valuations, positioning these stocks for further gains.
