Thematic Alpha Conviction into Earnings-110871152

M IdeaThematic Alpha | North AmericaConviction into Earnings2Q earnings season had strong EPS beat rates that saw outsized upward share-price moves to history. With consensus expecting +4% Y/Y sales growth and +3% EPS 4% Y/Y for the S&P 500 for 3Q, we highlight 11 names that Morgan Stanley's analysts expect to move meaningfully during 3Q earnings.Morgan Stanley & Co. LLCMichelle M. Weaver, CFAEquity Strategist Michelle.M.Weaver@morganstanley.com +1 212 296-5254 Michael J WilsonEquity Strategist M.Wilson@morganstanley.com +1 212 761-2532 Andrew B PaukerEquity Strategist Andrew.Pauker@morganstanley.com +1 212 761-1330 Diane Ding, Ph.D.Quantitative Strategist Qian.Ding@morganstanley.com +1 212 761-6758 Nicholas Lentini, CFAEquity Strategist Nick.Lentini@morganstanley.com +1 212 761-5863 THEME PICKS Positive Catalyst argenx Microsoft Blackline Prosperity Bancshares Eaton Seagate Technology Inari Medical Tandem Diabetes Care Lineage TransUnion Negative Catalyst Caterpillar Consensus expectations are for S&P 500 3Q EPS to be up +3% Y/Y on sales growth of +4.0% Y/Y. Earnings estimates have slid lower ahead of reporting season, and these negative revisions have been worse than the median quarter historically. As for price reactions, if the 2Q patterns hold, companies would need to beat on both EPS and Sales in order to see positive price reactions; companies that missed Sales estimates last quarter underperformed more notably. Our open questions into earnings:• Fed cuts are here. Are we seeing the 2H inflection or does this get kicked into 2025?• How feasible is 15% EPS growth in 2025? Margins are the key driver.• Consumer - Will Fed cuts free up spending intentions?• Election/Tariffs - What are the key risks? Are corporate spending decisions on hold until post election?Looking beyond 3Q, next-12-months EPS estimates have continued to push higher as more of 2025's estimate is baked in. Although 2024 and 2025 consensus EPS estimates have been revised lower recently, expectations are still for 9% growth in 2024 and 15% growth in 2025. Margins are expected to drive the majority of EPS expansion with consensus EBIT margins projected to expand 1.5% and net margins projected to expand 1% for FY2025. Against that backdrop, we highlight 11 names for which Morgan Stanley Research analysts expect a near-term catalyst that should drive a meaningful move in each stock: 10 where we expect an upward move, and 1 where we see downside risk on earnings. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.K