By Sagarika Jaisinghani

(Bloomberg) -- Investors should be more selective this earnings season as analysts’ views become more divergent, according to Morgan Stanley strategists.

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Earnings revisions — the number of analysts raising estimates minus those cutting forecasts — are showing greater differences between sectors, strategist Michael Wilson wrote in a note. “This should help to foster a strong stock-picking backdrop as we progress through the reporting season,” Wilson said.

Expectations for the overall S&P 500 index are low, with just a 2.5% increase seen for second-quarter earnings, the smallest since mid-2023, according to data compiled by Bloomberg Intelligence. That can boost the case for investors to narrow their focus to single stocks that analysts are more confident about.

Lower liquidity, which can exacerbate share-price moves, may also be a factor — with that of single stocks below a three-year average, John Marshall, head of derivatives research at Goldman Sachs Group Inc., wrote in a note last week. He expects an “unusually high” distribution in single-stock returns during the second-quarter reporting season compared with 2024.

Big banks including JPMorgan Chase & Co. and Citigroup Inc. are set to report results this week. Investors are also watching for the impact of the US trade war on profit margins and company guidance.

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.”

Morgan Stanley’s Wilson also said the new tax bill is likely to support large-cap equities in the US. The strategist reiterated a preference for financials and industrials sectors, citing strong earnings upgrades in recent weeks.

Wilson has remained largely bullish on the outlook for US stocks after ditching his pessimistic view in mid-2024.

--With assistance from Jan-Patrick Barnert.

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