MORGAN STANLEY WARNS OF CHOPPY MARKETS, STICKS TO RECOVERY CALL

Wall Street is off to a shaky start this earnings season, and investors are feeling the turbulence.

Despite a solid 6% earnings beat so far, equity investors aren’t celebrating. In fact, most companies that reported have seen their shares fall the next day. Morgan Stanley research lead by equity strategist Michael Wilson, suggests that the disconnect is due to lingering trade tensions, tighter liquidity, and a slowdown in earnings revisions, all of which are keeping markets on edge.

The S&P 500 SPX is still fairly valued, but the path forward looks bumpy, according to the strategists. They say that we’re in an early-cycle recovery, but warn that the market needs three things to stabilize: a clear de-escalation in the trade situation, steadier earnings forecasts, and more liquidity in the system. Without these, the risk of a near-term correction remains elevated.

The market has been jumpy. On Friday, the CBOE market volatility index VIX, often referred to as the market’s fear gauge, spiked to its highest level since April before easing during the session and falling again on Monday.

Analysts have started cutting earnings forecasts, and even companies that beat expectations are often not seeing their stock prices rise. Only 38% of S&P 500 firms have seen their shares go up the day after reporting. Morgan Stanley also notes that the gap between winners and losers is widening, making it harder to rely on the overall index.

So, with macro signals mixed and index-level gains stalling, investors are increasingly focused on company-level fundamentals.

The strategists note that stock-specific risk has risen sharply, and dispersion in earnings revisions breadth has surged, which they see as a hallmark of environments where active stock selection can shine. Until broader macro conditions improve, the market may remain range-bound, with elevated volatility and rotating leadership.

In this environment, companies with resilient earnings and strong revisions momentum are best positioned to outperform. Morgan Stanley’s “Fresh Money Buy List” highlights names like AbbVie ABBV , Northrop Grumman NOC , and Walmart WMT, all rated Overweight, citing solid fundamentals and attractive upside potential.

In short, the index may be stuck in neutral, but under the hood, there’s plenty of movement. As a result, the strategists say that for active investors, this could be a moment to shine.

(Rashika Singh)

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