Earnings revision breadth, an important measure for equities, is starting to trend lower as the market heads into a seasonally weaker period. According to Morgan Stanley analysts, this decline is primarily driven by several cyclical sectors, notably Autos, Materials, and Consumer Services.
Thus far into the earnings season, the market has been efficient in discounting earnings beats and misses, analysts noted. Earnings beats are being rewarded significantly more than in the last four quarters, with a T+1-day relative performance of 1.8% for the S&P 500 compared to a median of 0.5% over the previous four quarters."T+1" refers to the settlement of a trade one trading day after the transaction is executed.
They also noted that the current decline in earnings revisions is typical for this season and is expected to lead to a convergence of 2025 consensus earnings per share expectations toward Morgan Stanley's 2025 base case EPS expectation of $269. For now, Morgan Stanley continues to believe that the better risk/reward within small caps lies in growth equities. Analysts think these stocks should benefit from a lower cost of capital as the Fed cuts rates and are less adversely affected by the reasons enabling those cuts—namely, falling pricing power.
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