MS Mike Wilson Weekly Warm up Broadening Persists Amid a Quality Rotation

M August 10, 2026 04:01 AM GMT

US Equity Strategy | North America Morgan Stanley & Co. LLC Idea

Michael J Wilson Equity Strategist

Persists Amid a Quality Rotation

Equity Strategist The broadening in EPS growth and revisions continues, while the Diane Ding, Ph.D. Quantitative Strategist market is increasingly rewarding higher-quality earnings,

stronger free cash flow and AI-driven efficiencies. Favor quality, Nicholas Lentini, CFA Equity Strategist AI adopters, large cap Financials and Discretionary Goods.

• EPS Broadening Continues… Russell 3000 median stock EPS growth is 15%, the strongest since 2021, while revenue growth is 8%, the highest since 2023. 87% of S&P 500 companies are beating on EPS in 2Q, up from 82% last quarter. Further, S&P 500 earnings revisions breadth has rebounded to 23%, with 76% of industry groups showing positive revisions breadth, near a cycle high. • …While the Market Rewards Free Cash Flow—Supportive of Our Quality Thesis… The median S&P 500 stock with upward revisions to both 2026 EPS and free cash flow has outperformed by 1.6% post-reporting in 2Q, versus -0.2% relative performance for stocks with higher EPS but lower free cash flow revisions. We also see the market rewarding AI-driven efficiencies as our targeted adopter screen is outperforming. • Trade Ideas: ° Favor the quality factor and AI adopters—see here and here for our screens. ° We remain OW large-cap Financial Services, where earnings revisions are inflecting, and our regime analysis is supportive of relative outperformance. ° Within Tech, we continue to prefer Hyperscalers over Semis, given a combination of strong core businesses, underappreciated AI-related ROI and AI adoption opportunities. ° Consumer Discretionary Goods offers a compelling risk/reward as wallet share shifts from services toward goods and pricing improves.

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Broadening Persists Amid a Quality Rotation

As discussed previously, we believe the U.S. equity market is transitioning from an early- to mid-cycle regime. Historically, this is a period when leadership shifts from lower to higher quality as cyclically driven operating leverage begins to moderate and the market places greater emphasis on earnings durability, margin stability, free cash flow generation and operational efficiency. The maturation of the business and earnings cycles is consistent with this view, as is a Fed that appears to be transitioning from active easing toward a less dovish stance. The shift toward quality should be supportive of the S&P 500 as discussed last week given the index’s quality bias. In addition, a greater focus on margin expansion and operational efficiency should continue to favor companies demonstrating tangible benefits from AI adoption.

The earnings broadening continues. Our earnings broadening thesis continues to play out. Russell 3000 median stock EPS growth has accelerated to 15%, the strongest level since 2021, while median stock sales growth is running at 8%, around the best level since 2023. At the same time, 87% of S&P 500 companies are beating on EPS in 2Q, up from 82% last quarter. S&P 500 earnings revisions breadth stands at 23%, and 76% of S&P industry groups are now showing positive revisions breadth, both of these measures are near a cycle high.

The key point is that earnings strength is no longer confined to a narrow group of mega- cap stocks. Broader participation at the median-stock level, coupled with improving revisions breadth, remains consistent with our view that the earnings recovery is progressing and should support greater index resilience as the cycle matures.

Exhibit 1: Median Stock Sales Growth Is Strong Exhibit 2: Median Stock EPS Growth is Accelerating Russell 3000 Median Stock Sales…