Key Moments
- Morgan Stanley applies a quantitative Earnings Surprise Composite to identify U.S. and European stocks with high odds of beating earnings expectations.
- The strategy has delivered a pre-cost Sharpe ratio of 1.06 in the U.S. and 0.92 in Europe since 2024, with longer-term Sharpe ratios of 0.69 and 0.71 respectively.
- Highlighted names include Western Digital, Citigroup, RTX, Apple, and Roblox in the U.S., and ArcelorMittal, Barclays, ASML, Nokia, Santander, ASM International, and UPM-Kymmene in Europe.
Quant Model Targets Earnings-Season Upside
Morgan Stanley is spotlighting a new group of U.S. and European stocks that its models indicate have the greatest potential to deliver positive earnings surprises ahead of the upcoming reporting season. The firm relies on a quantitative framework that merges analyst opinions with forward-looking indicators to pinpoint companies that could outperform consensus expectations.
The methodology draws on inputs from the bank’s Earnings Forecast Landscape, its assessment of Earnings Quality, and trends in overall forecast revisions. These elements are integrated into what Morgan Stanley terms an Earnings Surprise Composite, designed to single out stocks where reported results may materially exceed market forecasts.
Performance of the Earnings Surprise Strategy
Morgan Stanley reported that this systematic approach has historically generated attractive risk-adjusted returns. Since 2024, the strategy has posted a pre-cost Sharpe ratio of 1.06 in the U.S. and 0.92 in Europe.
When extended over a longer track record, incorporating five years prior to the formal launch, the framework produced Sharpe ratios of 0.69 for U.S. names and 0.71 for European names, according to the bank. These figures are used to underscore the consistency of the earnings surprise selection process over multiple years and regions.
| Region | Period | Pre-cost Sharpe Ratio |
|---|---|---|
| U.S. | Since 2024 | 1.06 |
| Europe | Since 2024 | 0.92 |
| U.S. | Longer period (including 5 years pre-launch) | 0.69 |
| Europe | Longer period (including 5 years pre-launch) | 0.71 |
U.S. Stocks Highlighted for Earnings Upside
Among U.S. equities, Morgan Stanley’s top selections include Western Digital, Citigroup, and RTX. All three carry overweight ratings from the firm and score highly within the Earnings Surprise Composite, indicating elevated potential for earnings outperformance relative to current expectations.
The broader U.S. list also features Apple, eBay, ConocoPhillips, and Roblox. These names are identified within the same quantitative framework as candidates that may benefit from positive earnings surprises as the reporting season progresses.
European Equities with Strong Surprise Signals
On the European side, ArcelorMittal is singled out with a top percentile score in Morgan Stanley’s composite. The bank also cites Barclays, ASML, Nokia, Santander, ASM International, and UPM-Kymmene as notable contenders. Each of these European stocks is rated overweight by Morgan Stanley and appears prominently in its earnings surprise model.
Blending Quant Signals with Fundamental Views
The note emphasizes that aligning the quantitative Earnings Surprise Composite with traditional analyst research can help investors navigate earnings-related volatility. By combining systematic signals with fundamental judgments, Morgan Stanley suggests that investors may be better positioned in an environment where dispersion in corporate results remains elevated.
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