Morgan Stanley: European equities remain constructive in the medium term, but may enter a short-term pause ahead of earnings season
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Morgan Stanley: European equities remain constructive in the medium term, but may enter a short-term pause ahead of earnings season
The report argues that the rebound in European equities after the cooling of Middle East tensions has already been fairly substantial, and that the market needs to wait for further easing of Strait of Hormuz disruptions; earnings season will bring market focus back to bottom-up fundamentals, with Energy, Utilities, Banks, and Telecoms more likely to deliver upside surprises.
- Morgan Stanley had already shifted from tactical caution back to a bullish view on European equities earlier this month, but now believes the rebound may briefly pause, driven more by sentiment and geopolitical news flow than by deterioration in earnings fundamentals.
- Its composite earnings preview framework shows the strongest tendency for upside surprises in Energy, Utilities, Banks, and Telecoms, while Luxury, Autos, and Consumer Staples face higher downside risk.
- The report estimates that if oil reaches $90/bbl, European EPS growth would be about 10%, of which roughly 70% would come from the Energy sector; however, earnings remain healthy even excluding Energy.
- Europe has underperformed the US in the short term, but the report views this as tactical; MSCI Europe still trades at a meaningful NTM P/E discount to the US, currently around -21%.
Report interpretation
Overview
This is a European equity strategy and earnings season preview report. Morgan Stanley believes that the rebound in European equities after the rapid cooling of Middle East tensions has already priced in a significant amount of optimism, and that the market has high expectations for a near-term resolution of Strait of Hormuz disruptions, so a tactical bout of short-term choppiness may emerge. However, the report maintains a constructive medium-term stance, mainly because European earnings have not suffered the significant hit feared by the market, and rising energy prices could instead lift overall earnings growth.
Core views
The report's core views include: first, the short-term rebound in European equities may pause, but the medium-term outlook remains attractive; second, earnings season will shift the market back from macro and rotation-driven trading toward stock-specific fundamentals, with single-stock dispersion already above seasonal averages; third, upward revisions to European earnings are mainly driven by Energy, but earnings excluding Energy remain resilient; fourth, Energy, Utilities, Banks, and Telecoms are the sectors most likely to beat expectations, while Luxury, Autos, and Consumer Staples face greater downward revision or miss risk; fifth, Europe has temporarily lagged the US, but the valuation discount remains significant, and the report is more constructive than the market on Europe's medium-term opportunity relative to the US.
Analysis framework
The report combines multiple dimensions including macro geopolitical events, sector rotation, earnings estimate revisions, stock dispersion, analyst earnings previews, balance-sheet accrual metrics, breadth of earnings and target price revisions, idiosyncratic momentum, oil and gas correlation, Middle East and Asia revenue exposure, and China old-economy exposure to build a composite earnings preview screening framework for assessing sector and stock tendencies to beat or miss during earnings season.
Methodology notes
Multi-factor earnings beat screening
The framework integrates analyst preview data, accrual metrics, earnings revision breadth, target price revision breadth, idiosyncratic momentum, oil and gas correlation, regional revenue exposure, and China old-economy exposure, weighted by the research team's confidence; the report says accrual metrics carry the highest weight, followed by idiosyncratic factors and analyst earnings preview data.
Balance-sheet-based measure of future earnings quality
The report treats accrual metrics as an important input for earnings season screening to assess future earnings quality, with a higher weight than most other factors.
Bottom-up stock-picking environment during earnings season
The report observes that MSCI Europe single-stock dispersion has risen again and is above seasonal averages, which it believes will push the market away from sector rotation and short-covering trades toward company-level fundamental differentiation.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- European equitiesCore research focus
- Strengths
- Resilient medium-term earnings, energy-driven earnings upgrades, and a clear valuation discount versus the US.
- Weaknesses
- After the short-term rebound, sentiment expectations are relatively full, and the market remains affected by Strait of Hormuz and Middle East news flow.
- Comparison
- Has underperformed the US in the short term, but the report sees this as more tactical in nature; Europe's valuation discount remains attractive.
- Risks
- If Middle East disruptions escalate or the energy shock spills into demand, European risk assets may remain choppy.
- Energy sectorMain driver of earnings upgrades
- Strengths
- Higher oil prices materially boost European EPS growth, and the sector ranks at the top of the composite earnings preview screen.
- Weaknesses
- Earnings contribution is highly dependent on oil prices and the persistence of geopolitical events.
- Comparison
- Relative to most European sectors, Energy contributes the most to overall EPS upgrades.
- Risks
- If oil prices fall or Middle East disruptions ease quickly, earnings upgrades and market attention could fade.
- Utilities, Banks, TelecomsPotential upside-surprise sectors in earnings season
- Strengths
- The composite screening framework shows a strong tendency for these sectors to beat expectations.
- Weaknesses
- Sector performance remains influenced by rates, regulation, and the pace of defensive rotation.
- Comparison
- Relative to Luxury, Autos, and Consumer Staples, the risk-reward profile into earnings season is more favorable.
- Risks
- If the market rotates back toward high-beta cyclical rebounds, defensive sectors may lag relatively.
- Luxury, Autos, Consumer StaplesPotential downside-surprise sectors in earnings season
- Strengths
- Some companies may still retain brand strength or global revenue advantages.
- Weaknesses
- The report shows these sectors are more concentrated in misses and downward earnings revisions.
- Comparison
- Relative to Energy, Utilities, Banks, and Telecoms, earnings season screen results are weaker.
- Risks
- Weak demand, cost pressures, geopolitical disruptions, and China old-economy exposure may exacerbate earnings volatility.
- MSCI Europe relative to the USRegional allocation comparison
- Strengths
- Europe trades at about a -21% NTM P/E discount to the US, and the report believes the discount has room to narrow further.
- Weaknesses
- US earnings growth remains stronger than Europe's, and the US has a higher technology weighting.
- Comparison
- The report is more constructive than the market on Europe relative to the US, believing recent underperformance is mainly tactical.
- Risks
- If US tech earnings continue to outperform meaningfully, the relative recovery in Europe may be delayed.
Key data
- Report Date2026-04-17The front page shows the publication time as April 17, 2026 04:00 AM GMT.
- Oil Price Sensitivity$90/bbl oil implies about 10% European EPS growthThe report says this level would be significantly above top-down investor expectations and also above Morgan Stanley's previous 3.8% forecast.
- Energy ContributionAbout 70% of the 10% EPS growth is driven by the Energy sectorThe report compares this pattern with the energy-driven earnings growth of 2022.
- MSCI Europe 2026 EPS Growth Consensus14.0%The chart shows MSCI Europe 2026 EPS growth expectations rising to 14.0%, and 11.3% excluding Energy in 2026.
- Top Screen Performance Over the Past Two QuartersAbout 69% beat, 20% met, 11% missedThe report says its top composite earnings preview screen produced this distribution on average over the past two quarters.
- Top Screen Performance Last Quarter68% beat, 20% met, 12% missedThe main text provides a separate explanation of last quarter's screen performance.
- Bottom Screen Performance Last Quarter27% beat, 32% met, 41% missedThe bottom-screen basket was significantly more tilted toward earnings misses.
- European Cyclicals vs. Defensives ReboundHas recovered about 80% of the decline since the start of the yearThe report views this as a late tactical signal following a sharp reversal in rotation driven by Middle East and AI-related disruptions.
- Europe's Valuation Discount vs. the USCurrently around -21%The report believes Europe still trades at a meaningful NTM P/E discount to the US, and historical experience suggests there is room for further narrowing.
Impact & implications
For investors, the report suggests it may not be wise to simply chase the broad rebound after the easing of Middle East tensions in the short term, but instead to shift toward sector and stock selection during earnings season. Rising energy prices and earnings upgrades imply lower downside risk to European index earnings than the market fears, but the pace of the rebound may be affected by Strait of Hormuz news, investor sentiment, and rotation between cyclicals and defensives. At the portfolio level, the report more strongly supports focusing on European sectors with upside earnings surprise potential, quality-cyclical characteristics, or defensive traits, while remaining cautious on sectors with concentrated downward revisions such as Luxury, Autos, and Consumer Staples.
Risks
- The reopening of the Strait of Hormuz progresses more slowly than expected, causing continued volatility in oil prices and risk sentiment.
- Middle East tensions re-escalate, potentially shifting the market away from earnings fundamentals and back toward macro risk-off trading.
- European cyclicals relative to defensives have already recovered most of their year-to-date losses, creating short-term pullback risk after an excessive rebound.
- Energy contributes too large a share of European EPS growth, so if oil prices decline, overall earnings upgrades could be reversed.
- Downward revision pressure in sectors such as Luxury, Autos, Consumer Staples, and Travel & Leisure may weigh on market breadth.
- Whether Europe's valuation discount versus the US can narrow still depends on earnings delivery and investor fund flows.
What to watch
- The timetable for reopening the Strait of Hormuz and related Middle East news.
- The actual proportion of upside surprises in Energy, Utilities, Banks, and Telecoms during the European earnings season.
- Whether sectors such as Luxury, Autos, and Staples continue to see downward earnings revisions.
- Whether MSCI Europe 2026 EPS growth expectations remain above 10%, and whether Energy's contribution continues to expand.
- Whether dispersion among European stocks continues to rise, thereby supporting a bottom-up stock-picking environment.
- Whether Europe's NTM P/E discount versus the US continues to narrow from around -21%.
- The market reaction after the concentrated wave of European company earnings releases in the week of May 4.