Morgan Stanley identified eight US stocks expected to deliver earnings surprises as the second quarter earnings season begins the third week of July. The investment bank selected these companies from its 'Overweight' rated holdings, anticipating they will exceed market expectations with their earnings reports or guidance. This comes as the US stock market shifted focus in June from AI-driven momentum to fundamental earnings performance. While the tech sector declined nearly 3% and communication services fell over 7% in June, industrials gained 7% and healthcare rose 6% during the same period, reflecting investor rotation toward companies with improving earnings prospects.
US Stock Market Shifts from AI Momentum to Earnings Focus in June
The tech sector surged over 31% during the second quarter but declined nearly 3% in June, while communication services fell more than 7% in the same month. Industrials and healthcare emerged as new market leaders with gains of 7% and 6% respectively in June. This rotation reflects a market transition from AI expectations to actual earnings performance, as AI investment and capital expenditure expansion spread to industrials, financials, and energy sectors.
Morgan Stanley Selects Eight Stocks for Q2 Earnings Outperformance
Starting the third week of July, major US banks will begin reporting second quarter results, with 28 S&P 500 companies scheduled to announce earnings this week. Morgan Stanley compiled a list of companies from its 'Overweight' rated holdings that are likely to present earnings or guidance exceeding market expectations. Morgan Stanley analyst Michael Wilson stated that capital expenditure is expanding beyond data centers to manufacturing broadly, and reshoring is contributing to a new growth cycle for US industry.
GE Vernova Gains 64% Year-to-Date on Infrastructure Demand
GE Vernova (NYSE: GEV), a global energy infrastructure company, saw its stock price surge 64% year-to-date as infrastructure demand increased due to AI investment expansion. Earlier this year, the GE Vernova CEO told investors that turbine reservations would be fully booked through 2030. The company benefits from capital expenditure spreading across manufacturing and reshoring trends.
United Airlines Stock Rises 24% in Three Months Despite Fare Increases
United Airlines (NASDAQ: UAL) stock climbed 24% over the past three months as travel booking demand remained solid despite flight disruptions and airfare price increases. Airfare prices increased for seven consecutive periods without demand decline. Morgan Stanley noted that if United Airlines provides stronger earnings guidance than market expectations for the remainder of the year, the stock could see additional gains. The airline analyst stated that demand sustainability is the key factor, as airfare is unlikely to decrease easily even if oil prices fall.
Lam Research Surges 102% Year-to-Date on AI Chip Equipment Orders
Lam Research (NASDAQ: LRCX), a global semiconductor equipment company, saw its stock price jump 102% year-to-date driven by AI investment expansion. The company is scheduled to report earnings on the 29th. Morgan Stanley projected that if the company presents stronger revenue guidance than market expectations, the stock could continue rising. The firm assessed that despite recent market corrections, demand across the AI ecosystem remains solid and new semiconductor equipment orders are improving.
State Street Corporation Target Price Raised to $183 by Morgan Stanley
State Street Corporation (NYSE: STT), a global custody bank that manages institutional investor assets and operates SPDR ETFs, received a target price increase from Morgan Stanley in June. The firm raised the target from $166 to $183 while maintaining its 'Overweight' rating. The stock market rally is expected to increase custody and managed assets, leading to higher fee income. The market anticipates earnings per share (EPS) to increase approximately 20% this year compared to last year, and the company plans to raise its quarterly dividend by 10%.
Rollins Maintains Stable Revenue with Subscription-Based Pest Control Model
Rollins (NYSE: ROL), the largest pest control company in the US operating brands including Orkin, maintains a stable revenue structure with a high proportion of subscription-based recurring revenue from regular contracts. Morgan Stanley lowered the target price slightly from $70 to $65 on the 8th but maintained its 'Overweight' rating. First quarter revenue increased 10.2% year-over-year, and organic revenue excluding acquisition effects grew 6.6%. The market expects annual earnings per share (EPS) to increase approximately 10.7% this year.
American Airlines Target Price Increased to $24 on Route Competitiveness
American Airlines (NASDAQ: AAL) received a target price increase from Morgan Stanley in June from $20 to $24 while maintaining an 'Overweight' rating. Earlier this month, the firm cited improved profitability, route competitiveness, and financial structure improvement as positive factors. Premium seats and corporate travel demand are increasing while travel demand persists despite recent airfare increases. American Airlines' debt decreased to its lowest level since 2015. However, fuel cost burden from rising oil prices remains significant, so actual stock recovery depends on how much costs can be offset by fare increases.
Bloom Energy Positioned for Data Center Power Demand Growth
Bloom Energy (NYSE: BE), a power generation fuel cell company, is attracting attention for solving AI data center power shortage issues. Morgan Stanley reaffirmed its 'Overweight' rating and $310 target price earlier this month. The firm projected that Bloom Energy will benefit as on-site power generation increases, allowing electricity procurement outside the power grid, particularly as data center construction delays due to transmission network shortages and local resident opposition. However, the firm noted that expectations are already substantially reflected in the stock price and volatility could be high during earnings announcements due to controversy surrounding the order backlog.
International Flavors & Fragrances Sells Food Ingredients Unit for $4.3 Billion
International Flavors & Fragrances (NYSE: IFF), a company that develops fragrances and functional ingredients for perfumes, cosmetics, and consumer products, received a target price increase from Morgan Stanley on the 1st from $93 to $95 while maintaining an 'Overweight' rating. IFF's first quarter revenue and profit exceeded market expectations, with sales volume increasing across all four business segments. In May, the company sold its food ingredients business unit for approximately $4.3 billion, allowing it to focus on higher-margin fragrance and bio-material businesses and reduce debt with the sale proceeds.
FAQ
What stocks did Morgan Stanley identify for Q2 earnings surprises?
Morgan Stanley identified eight US stocks from its 'Overweight' rated holdings expected to exceed market earnings expectations: GE Vernova (NYSE: GEV), United Airlines (NASDAQ: UAL), Lam Research (NASDAQ: LRCX), State Street Corporation (NYSE: STT), Rollins (NYSE: ROL), American Airlines (NASDAQ: AAL), Bloom Energy (NYSE: BE), and International Flavors & Fragrances (NYSE: IFF).
How did US stock sectors perform in June?
In June, the tech sector declined nearly 3% and communication services fell over 7%, while industrials gained 7% and healthcare rose 6%. This represented a shift from the second quarter when the tech sector surged over 31%, as investor focus moved from AI momentum to fundamental earnings performance.
When does the Q2 earnings season begin for US stocks?
The second quarter earnings season begins the third week of July, starting with major US banks. This week alone, 28 S&P 500 companies are scheduled to report their earnings results.
