US Equity Strategy Data Pack
August 2026
Morgan Stanley's August 2026 US Equity Strategy Data Pack argues that the cycle is moving from early to mid cycle, favoring quality, with momentum rotating away from semiconductors while hyperscalers remain attractive with important dispersion risk.
Key points
- An Early-to-Mid Cycle Transition Has Begun, Favoring Quality.
- As the business cycle matures and post-recession operating leverage moderates, leadership should rotate toward companies with more stable earnings, strong margins, and operational efficiency.
- High quality represents 42% of the S&P versus 28% for low quality, while median stock earnings growth accelerates to 14% as revisions breadth improves. The setup should support greater index resilience, broader participation, and 8,000 on the S&P by year-end, in Morgan Stanley's view.
- One of the Worst Momentum Sell-Offs in History.
- Momentum is rotating toward quality, Insurance, and Healthcare Equipment & Services, and away from the Semiconductor trade based on the three-month versus twelve-month momentum analysis.
- We Still Favor Hyperscalers and Mag 7 over Semis with an Important Caveat.
- Hyperscalers combine attractive relative value, with their forward multiple in just the third percentile back to 2023, and meaningful AI optionality as both enablers and adopters.
- Dispersion among Hyperscalers is expected to increase, with ROI, balanced capex communication, and quality as key differentiating factors.
Narrative
Cyclically Sensitive Stocks Underperformed in 2024 and Early 2025…
...With Sentiment Capitulating on ‘Liberation Day’
The Low Also Coincided with a V-Bottom in Earnings Revisions Breadth
The Median Stock Is Now Recovering and Seeing the Strongest EPS Growth in 4 Years
Our Leading Earnings Model Is Forecasting Double Digit EPS Growth
We Expect Earnings Growth to Accelerate for the Average Stock
AI-Related Stocks Remain a Key Market Driver
Year Ahead Price Targets and Sector Preferences
Earnings & Valuation
Earnings Continue to Drive the S&P 500 Higher Despite the Valuation Pullback
Morgan Stanley Earnings Models
Consensus Is Pricing Strong Earnings through 2026
Earnings Revisions by Size and Sector – 2026 Estimates
% Change to 2026 Earnings Estimates Over the Last 12 Months & Year to Date
S&P 500 Sector Level Earnings Revisions Breadth – Pt. 1
S&P 500 Sector Level Earnings Revisions Breadth – Pt. 2
US Equity Risk Premium Remains Historically Low
S&P 500 Next Twelve Month Equity Risk Premium
US Equity Market Traditional Valuation Measures
S&P 500 NTM P/S
S&P 500 NTM P/E
S&P 500 NTM EV/EBITDA
S&P 500 NTM P/B
Valuation by Size and Sector – Current FWD P/E vs 4 Yr. Median
Valuation by Size and Sector – Current FWD P/Sales vs 4 Yr. Median
Quant
Stock Specific Risk Fell Sharply Post Liberation Day and Has Since Rebounded
Return Dispersion is on the Rise in 2026
Estimate Dispersion Has Also Ticked Higher in 2026
Return Dispersion Has Risen in 2026
Book-to-Price Dispersion Below Median
Earnings Yield Dispersion Falling as Valuations Rise
Market Cap and Equal Weighted Indexes Show Differing Pictures
Cap Weight vs Equal Weight 12-Month Total Return Cap Weight vs Equal Weight Performance YTD
Sector Views
Our Sector Recommendations
Our Sector Recommendations
Overweight: Industrials
- Earnings revisions and macro indicators for Capital Goods and Transports have inflected higher, despite geopolitical and tariff- related risks.
- Manufacturing data remain supportive: new orders rising, inventories benign, ISM resilient, and backlogs meaningfully improving.
- Manufacturing data remain supportive: new orders rising, inventories benign, ISM resilient, and backlogs meaningfully improving.
- Freight spend growth, improving C&I loans, and stabilizing short-cycle revenues signal a healthier industrial demand backdrop.
- Freight spend growth, improving C&I loans, and stabilizing short-cycle revenues signal a healthier industrial demand backdrop.
- Capex growth is accelerating, driven by earnings recovery, fiscal tailwinds, data-center buildout, and reshoring dynamics.
- Capex growth is accelerating, driven by earnings recovery, fiscal tailwinds, data-center buildout, and reshoring dynamics.
ISM Manufacturing PMI Has Held Up Well Despite the Geopolitical Risks Capex Growth Picking Up for Both the Mag 7 and S&P 493
Overweight: Financials
- Banks hold a significant amount of excess capital and our MS Banks team models this to expand with Basell III Endgame and GSIB surcharge revisions.
- Forward earnings growth is improving (14%), valuations remain attractive (12x), and earnings revisions breadth has turned positive.
- Forward earnings growth is improving (14%), valuations remain attractive (12x), and earnings revisions breadth has turned positive.
- Loan growth and SLOOS signal upside momentum, especially for mid-size and regional banks; M&A activity is set to recover.
- Loan growth and SLOOS signal upside momentum, especially for mid-size and regional banks; M&A activity is set to recover.
- Positioning is extremely light, leaving the excess-capital and earnings-upside narrative largely out of consensus.
- Positioning is extremely light, leaving the excess-capital and earnings-upside narrative largely out of consensus.
Overweight: Consumer Discretionary Goods
- U.S. consumer remains resilient despite higher gas prices, supported by high-income spending share and ~$65B real income tailwind from the OBBBA.
- Household balance sheets continue improving; labor market is stable, and aggregate consumer earnings expectations are up since Iran conflict.
- Household balance sheets continue improving; labor market is stable, and aggregate consumer earnings expectations are up since Iran conflict.
- Consumer Staples are more sensitive to energy prices; we prefer Discretionary as earnings revisions breadth re- accelerates.
- Consumer Staples are more sensitive to energy prices; we prefer Discretionary as earnings revisions breadth re- accelerates.
- Discretionary Goods benefit from services-to-goods wallet shift, improving pricing, and technical support at long-term relative levels.
- Discretionary Goods benefit from services-to-goods wallet shift, improving pricing, and technical support at long-term relative levels.
Higher Income Consumer Drives Large Share of Personal Consumption Household Liabilities As A Share of Household Assets Continue to Fall
Underweight: Consumer Staples & Real Estate
- We are underweight Consumer Staples and Real Estate on the back of our view that the rolling recession ended on Liberation Day and that we have begun a new rolling recovery. These sectors are likely to lag on a relative basis, in our view.
- We have a preference for Cyclicals over Defensives in 2026 as we believe strong operating leverage will drive market broadening.
- We have a preference for Cyclicals over Defensives in 2026 as we believe strong operating leverage will drive market broadening.
- Consumer Staples face headwinds from tariffs, commodity costs, low immigration, and a weakening low-income consumer. Utilities are highly bifurcated between AI-plays and more traditional energy providers.
- Consumer Staples face headwinds from tariffs, commodity costs, low immigration, and a weakening low-income consumer. Utilities are highly bifurcated between AI-plays and more traditional energy providers.
Real Estate Has Held a High Correlation with Rate Moves in Recent Years Staples are More Sensitive to Higher Gas Prices than Discretionary
Equal Weights
Healthcare Technology
- AI-exposed stocks continue to outperform the broader index as continued capex spend fuels an ongoing investment cycle.
- Healthcare valuations continue to look cheap on a relative basis and sit within the bottom quintile historically.
- Healthcare valuations continue to look cheap on a relative basis and sit within the bottom quintile historically.
- Policy overhangs have reduced which is increasingly reflected in prices (clearer CMS pricing guidance, on-time PDUFAs, and tariff/MFN dynamics). This has brought generalists back into the Healthcare trade from our conversations.
- Policy overhangs have reduced which is increasingly reflected in prices (clearer CMS pricing guidance, on-time PDUFAs, and tariff/MFN dynamics). This has brought generalists back into the Healthcare trade from our conversations.
- Our CIO survey data is expecting a pickup in Tech spending in 2026 across all pockets.
- Our CIO survey data is expecting a pickup in Tech spending in 2026 across all pockets.
- The Tech sector is highly levered to labor productivity gains as AI implementation diffuses across the economy.
- The Tech sector is highly levered to labor productivity gains as AI implementation diffuses across the economy.
- We see the hyperscalers as an attractive relative value trade given their strong forward earnings growth at undemanding valuation levels.
- We see the hyperscalers as an attractive relative value trade given their strong forward earnings growth at undemanding valuation levels.
Equal Weights
Energy Utilities
- Utilities are beneficiaries of the GenAI theme and can benefit from increased interest and focus on Energy capacity.
- Energy equities outperformed the index through early March but have lagged on a relative basis as investors moved past peak uncertainty.
- Energy equities outperformed the index through early March but have lagged on a relative basis as investors moved past peak uncertainty.
- Reliable energy sources are increasingly important and the post Covid era has sparked traditional capex spending. Utilities with exposure to both traditional and clean energy ventures are set to benefit and reinvestment could provide further support for the sector.
- Reliable energy sources are increasingly important and the post Covid era has sparked traditional capex spending. Utilities with exposure to both traditional and clean energy ventures are set to benefit and reinvestment could provide further support for the sector.
- Geopolitical uncertainty is still high in absolute terms and energy equities could outperform if tensions reignite.
- Geopolitical uncertainty is still high in absolute terms and energy equities could outperform if tensions reignite.
- FCF margin for the space remains well above its historical average, net debt to EBITDA remains below its long-term run rate and HF net exposure appears under-owned.
- FCF margin for the space remains well above its historical average, net debt to EBITDA remains below its long-term run rate and HF net exposure appears under-owned.
- Ultimately, we prefer cyclical over defensive exposures in what we believe is an early-to-mid cycle environment.
- Ultimately, we prefer cyclical over defensive exposures in what we believe is an early-to-mid cycle environment.
Equal Weights
Materials Communication Services
- Technology spend and media advertising are both cyclical metrics and winners may be idiosyncratic ahead.
- Materials are a cyclical sector but are highly sensitive to global growth. The sector is highly dependent on commodity pricing which may not recover in-line with the expected US recovery.
- Materials are a cyclical sector but are highly sensitive to global growth. The sector is highly dependent on commodity pricing which may not recover in-line with the expected US recovery.
- A few names take up a large share of the sector and continue to crowd out smaller, incumbent names.
- A few names take up a large share of the sector and continue to crowd out smaller, incumbent names.
- Increased capex remains a catalyst for materials and the sector could benefit from the start of a new capex cycle.
- Increased capex remains a catalyst for materials and the sector could benefit from the start of a new capex cycle.
- Cap-weighted Comm. Services has performed well given the high concentration in megacap stocks. We are watching the equal weighted performance as broader sign.
- Cap-weighted Comm. Services has performed well given the high concentration in megacap stocks. We are watching the equal weighted performance as broader sign.
Rising Capex is Historically Positive for Materials but GenAI is Causing a Shift in the Type of Capex Spend Communication Services Revisions Breadth Rebounding
Morgan Stanley Sector Analyst Sentiment Tracker
Macro & Misc.
Tech Saw a Pullback in July
US PMI Snapshot
Global Macro Backdrop
Global Equity Risk Premiums