US mega caps are attractive as they’re likely to be boosted by the fiscal spending bill as well as a robust earnings outlook, according to Morgan Stanley strategists.
The team led by Michael Wilson said the tax bill is likely to be positive for cash flow, supporting the case for technology, communication services, health care and energy stocks, among others.
Additionally, the sharp improvement in earnings revisions breadth — the number of analysts raising estimates minus those cutting forecasts — has lifted investor sentiment at a time of lingering trade uncertainty, Wilson said. He reiterated a preference for financials and industrials sectors, citing strong profit upgrades in recent weeks.
“The new tax bill is constructive for large cap indices as are strong EPS revisions,” Wilson wrote in a note.
US stocks have rallied to record highs on bets that resilient economic growth would continue to boost corporate earnings. The $3.4 trillion fiscal package, which includes tax cuts, has also rekindled demand for American assets.
That optimism faces a key test with big banks including JPMorgan Chase & Co. and Citigroup Inc. set to kick off the reporting season this week. Analysts expect S&P 500 firms to post a 2.5% increase in second-quarter earnings, the smallest since mid-2023, according to data compiled by Bloomberg Intelligence.
Still, Wilson said analysts’ views among sectors are more divergent, which “should help to foster a strong stock-picking backdrop as we progress through the reporting season.”
Meanwhile, the impact of President Donald Trump’s trade war on profit margins and company guidance remains in focus. In his latest tariff ultimatum, Trump declared a 30% rate for Mexico and the European Union.
Goldman Sachs strategist David Kostin said shrinking margins could reduce his forecast for a 7% increase in S&P 500 earnings per share for 2026. On the other hand, “earnings growth next year will be greater than we forecast if companies continue to expand margins and the recent fiscal package helps boost revenue growth.”
Wilson has remained largely bullish on the outlook for US stocks after ditching his pessimistic view in mid-2024.
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