Investing.com -- Morgan Stanley analysts identified ten stocks with strong upside potential heading into Q3 earnings while warning of downside risks for one key name—Caterpillar.
The investment bank highlights both positive and negative catalysts expected to impact company results, offering investors a roadmap for navigating the earnings season.
Morgan Stanley noted that "companies would need to beat on both EPS and Sales in order to see positive price reactions" in Q3, referencing trends from the previous quarter, where firms that missed sales estimates underperformed more notably.
With consensus expectations forecasting S&P 500 earnings to rise by 3% year-over-year and sales by 4%, the bank has highlighted ten companies expected to post strong results.
Microsoft (NASDAQ:MSFT) stands out among the recommended stocks.
"Positioning MSFT to outperform expectations as data center capacity ramps and Azure growth accelerates into high >30% in 1Q25," the bank wrote.
Morgan Stanley explains that the view reflects the company's strategic efforts to position itself well for the recovery in enterprise spending.
Other names on Morgan Stanley's list include argenx, which is expected to show "strong implied sales for its drug Vyvgart," and Eaton (NYSE:ETN), which should benefit from "another year of HSD organic margin improvement."
Meanwhile, Seagate Technology is expected to see capacity growth and relative pricing strength. Other names on the list include Blackline, Inari Medical, Lineage, Prosperity Bancshares (NYSE:PB), Tandem Diabetes Care (NASDAQ:TNDM), and TransUnion (NYSE:TRU).
However, the outlook isn't all rosy. Morgan Stanley says Caterpillar (NYSE:CAT) is at a "mid-cycle multiple on what we believe is closer to peak earnings," noting risks from weaker construction equipment sales.
Beyond Q3, the bank expects continued earnings expansion driven by margin growth in 2025. Yet questions remain, including the impact of Fed rate cuts and corporate spending decisions in the lead-up to the U.S. elections.