Morgan Stanley Points to Japan, Europe for Equity Opportunities

Andrew Slimmon of Morgan Stanley highlighted opportunities in Japan and Europe, flagging European defense as one sector.

The view that these markets underperform the US due to frequent earnings misses is beginning to shift, according to Slimmon.

What Morgan Stanley Sees in Japan and Europe

Speaking on CNBC's Squawk Box Asia, Slimmon, a managing director and senior portfolio manager at Morgan Stanley Investment Management, attributed Japan's year-to-date gains to upward earnings revisions.

“We’re seeing a lot of companies that are starting to revise up their earnings estimates, and that’s, I think, the key reason why the Japanese stock market has done well this year,” Slimmon said.

The Nikkei 225's performance reflects the strength of Japanese equities. As of September 18, the index had risen roughly 25.4% for the year, though it remained almost 12% off its June peak.

Slimmon noted Europe's defense sector is an opportunity but not the sole one. He highlighted banks, which have done well, with the STOXX Europe 600 Banks index up about 18.87% this year.

According to Slimmon, equities are now reacting to the growth shown in earnings revisions, marking a key distinction between 2026 and prior years.

Regarding US stocks, Slimmon said a narrow market breadth—where a handful of mega-caps drive the index—is not necessarily negative. On September 16, the Federal Reserve raised its benchmark rate by 25 basis points to 3.75%-4%, its first hike since 2023.

He observed that the market was at the same level on the day of the rate increase as it was in May.

“So the market has really treaded water here for a while, and yet earnings revisions keep going up. They keep going up. So I think that’s why I remain optimistic,” he added.

The bank's chief US equity strategist, Mike Wilson, took a more cautious stance earlier in September. He cautioned that oil prices rising to $120 or more in a month would reduce liquidity.

Morgan Stanley Swaps 12 of 15 Picks After a Market-Beating Year

The bank's equity strategists have also made their own US stock picks. Morgan Stanley updated its Vintage Values list—a set of stocks intended for 12-month holding. The 2026 version delivered a 32.12% return from September 9, 2025, to September 11, 2026.

Over that same interval, the S&P 500 rose about 19%, meaning the list outperformed by 1,316 basis points. For the 2027 edition, strategists reduced over 50 analyst picks to 15, with only Amazon, McKesson, and Visa retained from the prior year.

New additions include Alphabet, Apple, Coca-Cola, Dynatrace, Eli Lilly, Equinix, and Williams Companies.

Among the 15 stocks, 60% fall into the top two quality tiers, versus 56% for the S&P 500. On most valuation metrics, the list also trades at a premium to the overall market.

Equity strategist Michelle Weaver described the list as having an "anti-momentum" bias.

“The stocks on the list are not simply stocks that have worked recently but rather ones our analysts have identified for their strong bottom-up drivers,” Weaver wrote in a note.

Some of the new picks have underperformed this year. As of September 21, Eli Lilly had gained roughly 8%, trailing the S&P 500's 13% advance.

Through September 15, Alphabet had climbed 10.5%, also behind the index. Coca-Cola has been the standout, up roughly 28%.

This blend aligns with Weaver's observation that the list is not merely a selection of recent winners. The third-quarter earnings season—including Coca-Cola's report on October 20—will provide an early indication of whether those individual company drivers persist.