2Q Earnings Preview: Earnings Resilience and AI Adoption Continue to Support the Diffusion of U.S. Equity Leadership

Overview

This report is a 2Q26 earnings preview from Morgan Stanley's U.S. equity strategy team, blending macro data with bottom-up views from coverage analysts and focusing on earnings resilience, AI investment, pricing power, input costs, consumer spending, and industrial demand. The key takeaway is that the equal-weight S&P 500 has outperformed the market-cap-weighted index since mid-May, indicating leadership is diffusing across the market; the median S&P 1500 company is posting double-digit EPS growth, and the earnings base is broader than before.

Core views

The report believes the market is still earnings-driven. The 2Q26 earnings bar is elevated because 2Q EPS consensus guidance was raised about 2% ahead of the quarter, but sales and earnings growth remain robust. 2026 earnings expectations have been raised to 24% year-over-year growth, with growth contributions coming roughly equally from revenue growth and margin expansion. The Mag 7 are expected to grow earnings 30% in 2026 versus 16% for the S&P 493, but there are early signs that valuation and earnings expectations for the S&P 493 are also being revised higher. By sector, AI-related semiconductor and infrastructure software demand is strong; industrials benefit from capex dispersion, reshoring, and AI infrastructure investment; financials benefit from loan growth and active capital markets; and consumer services and lodging show signs of early-cycle recovery.

Analysis framework

The report combines a top-down and bottom-up approach: on one side, it reviews S&P 500 earnings revision breadth, sales and EPS consensus expectations, margins, price reaction, and sector dispersion; on the other, it compiles a systematic preview of sector KPIs and 12-month EPS impacts from Morgan Stanley U.S. coverage analysts and tracks company statements on AI adoption and quantifiable impact through text analysis.

Methodology notes

• earnings_previewsystematic_earnings_preview

  Systematic Earnings Preview

  Morgan Stanley analysts forecast key KPIs and the 12-month EPS impact for covered companies individually, with calls categorized as very bearish, bearish, in-line, positive, and very positive, and compute a net score by subtracting the negative share from the positive share and dividing by the total number of responses.

• earnings_revisionearnings_revision_breadth

  Earnings Revision Breadth

  The report uses S&P 500 earnings revision breadth to measure the dispersion of upward and downward revisions; pre-2Q FY2 earnings revision breadth is +24%, which is viewed as a historically strong earnings momentum signal.

• thematic_text_analysisai_adoption_transcript_analysis

  AI Adoption Text Analysis

  The report systematically analyzes company earnings calls and management commentary, recording whether firms mention AI adoption and whether they disclose a quantifiable impact, to assess whether the AI theme is spreading beyond a small set of firms to a broader range of industries.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• S&P 500

  Core market benchmark

  Strengths

  Strong earnings revision breadth, robust 2Q EPS and sales growth outlook, and continued upward revision of 2026 earnings expectations.

  Weaknesses

  2Q EPS outlook has already been revised higher ahead of the quarter, making the earnings bar higher than usual.

  Comparison

  The Mag 7 still have higher earnings growth, but the S&P 493 shows early signs of upward revisions, supporting the diffusion of leadership.

  Risks

  The dispersion trade could be challenged if the earnings upside does not materialize, margin expansion does not hold, or macro data weakens.

• Discretionary Consumption

  Preferred cyclical exposure

  Strengths

  Relatively strong EPS revision breadth, durable durable-goods demand, and early-cycle recovery in travel, gaming, and lodging.

  Weaknesses

  Some apparel and branding demand weakened in June, and lower-income consumers remain under pressure.

  Comparison

  The report ranks discretionary consumption and transportation together as preferred cyclical trades.

  Risks

  The near-term acceleration may be limited if high July comparisons, fuel costs, or labor pressures weigh on spending.

• Transportation

  Preferred cyclical exposure

  Strengths

  Relatively strong recent EPS revision breadth, healthy airline demand and booking intent, and steady pricing increases that have not damaged demand.

  Weaknesses

  The freight outlook remains mixed, and recent improvements may reflect supply availability rather than demand expansion.

  Comparison

  Compared with energy, materials, and healthcare, transportation shows more resilient earnings revision trends.

  Risks

  Demand sustainability remains the key validation point for the airline and freight segments.

• Semiconductors and AI Infrastructure

  Core thematic exposure

  Strengths

  Strong AI demand, with hyperscale cloud players still facing compute shortages; memory in data centers is a major bottleneck and 3Q pricing is expected to rise about 30% again.

  Weaknesses

  Some investors dispute Meta's neocloud strategy, and recent market volatility has been elevated.

  Comparison

  AI-related companies still exhibit stronger earnings momentum than non-AI firms, but AI gains are spreading to a wider range of sectors.

  Risks

  If AI capex guidance disappoints or memory prices rise too quickly and suppress demand, related assets could see drawdowns.

• Software and Cybersecurity

  Beneficiary of AI adoption

  Strengths

  Software budgets are ticking up modestly, infrastructure data layers are the strongest source of momentum, and cybersecurity spend is increasingly important as AI agent deployments expand.

  Weaknesses

  SaaS remains challenging and investor sentiment toward application software is still relatively negative.

  Comparison

  Infrastructure software performance is more concentrated, while improvements in application-layer demand may still take several quarters.

  Risks

  Out-of-band AI spending, changes in consumer pricing models, and corporate cost discipline could create revenue visibility uncertainty.

• Financials and Banks

  Beneficiaries of capital markets and loan growth

  Strengths

  Loan demand is broadly strong, around 7.5% year-over-year growth; 2Q26 M&A, ECM, and DCM activity has improved significantly, and credit quality is stable.

  Weaknesses

  Rising deposit costs and forward-curve implied rate hikes could pressure EPS in the second half and in 2027.

  Comparison

  Capital-market activity is spreading from mega-size transactions toward mid-size transactions, which is supportive of bank fee income.

  Risks

  Deposit competition, interest-rate repricing, and higher funding costs could offset the benefit of loan growth.

• REITs

  Commercial real estate cyclical improvement exposure

  Strengths

  The CRE cycle appears to be at a sweet spot, with approximately 4% organic growth in 1Q, healthy transaction activity and capital availability, and about $60 billion of M&A so far in 2026.

  Weaknesses

  CRE prices previously fell 12% from their peak; although there has been a rebound, the recovery appears to be at an early stage.

  Comparison

  Compared with the prior phase of price declines, transaction confidence and financing activity have improved materially.

  Risks

  If rates rise again or capital markets tighten, valuation and transaction recovery could slow.

Key data

• S&P earnings revision breadth+24%Pre-2Q26 earnings-season level, described as very strong in historical context.
• 2Q26 EPS forecast19% Y/YConsensus year-over-year EPS growth for the S&P 500 in the second quarter.
• 2Q26 sales outlook9% Y/YConsensus year-over-year second-quarter sales growth for the S&P 500.
• 2Q EPS pre-quarter revision+2%The report views the earnings bar as slightly higher than normal versus the usual seasonal downtick.
• 2026 EPS growth outlook24% Y/YThe report says revenue growth and margin expansion contribute roughly equally to earnings growth.
• 2027 EPS growth outlook17% Y/YReported on a consensus basis.
• 2026 sales growth outlook9%Reported on a consensus basis.
• 2027 sales growth outlook8%Listed in the report as the 2027 growth expectation.
• Mag 7 2026 earnings growth30%Higher than 16% for the S&P 493, but the S&P 493 shows early signs of valuation and earnings revisions.
• Share of AI-adopting companies with quantifiable impact40%In 2Q26, 40% of companies identified as AI adopters by analysts disclosed at least one quantifiable AI impact, above 37% in 1Q26 and 21% in 2Q25.
• Share of S&P 500 companies with quantifiable AI benefitsabout 25%Up from 14% a year ago.
• Actual LTM EBIT margin19.2%Expected to be 20.3% for FY2026 and 22.0% for FY2027.
• Actual LTM net margin14.5%Expected to be 15.4% for FY2026 and 16.6% for FY2027.

Impact & implications

If the report's thesis plays out, U.S. equity performance may continue to diffuse from AI mega-cap leaders to a broader set of industries, with the equal-weight index, S&P 493, discretionary consumption, transportation, industrials, financials, and certain REITs potentially receiving stronger earnings support. At the same time, dispersion in stock-level outcomes during the earnings season is elevated, so differences in earnings and price reactions may amplify, and investors need to pay closer attention to sector and company-level KPIs, capex guidance, pricing power, and margin realization.

Risks

• 2Q26 EPS expectations have been revised up, and the earnings bar is higher than the normal seasonal pattern, which could limit upside surprise potential.
• Earnings and price reactions are highly dispersed, so individual-stock idiosyncratic volatility may be stronger during the earnings season.
• Earnings revision breadth in energy, materials, and healthcare has shown the most negative recent changes, which could weigh on portions of sector performance.
• Higher bank deposit costs, forward-rate repricing, and branch expansion costs could suppress subsequent EPS.
• Lower-income consumers remain under pressure, and if consumer resilience weakens, the recovery case for discretionary consumption and services could be challenged.
• If AI capex, data-center memory pricing, and compute bottlenecks generate cost pressure or demand destruction, AI themes may not sustain.

What to watch

• The impact of bank performance, CPI, and PPI inflation data on rate expectations and the financial sector.
• Corporate guidance on capex, AI budgets, compute constraints, and data-center memory pricing.
• Whether S&P 500 earnings revision breadth can remain in a strong range.
• Whether 2Q26 EPS and sales upside rates can reach the mid-to-high single digits.
• Whether EPS revisions in discretionary consumption and transportation continue to remain relatively strong.
• Whether margin expansion materializes, especially in balancing revenue growth against cost pressure.
• Whether S&P 493 earnings expectations continue to be revised up, thereby confirming leadership diffusion.