Group 1: Core Insights - The focus of the Q2 2025 earnings season is whether the profit downgrades for consumer internet companies (Alibaba, Meituan, Pinduoduo, Ctrip) have ended, which will influence investor decisions between digital entertainment leaders and consumer internet stocks [1][2] - Over the past three months, consumer internet stocks have seen an average price decline of 5%, while digital entertainment leaders have experienced a 31% increase, driven by intense competition and investment in the consumer internet sector [1][2] - Morgan Stanley's current preferred stocks in the industry are Tencent Music (TME), Kuaishou, Alibaba, Ctrip, and Tencent [1] Group 2: Investment Trends - There is no conclusive evidence that profit downgrades for consumer internet companies have ended, but Morgan Stanley believes selectively shifting from digital entertainment to consumer internet offers a favorable risk-reward ratio [2][3] - The investment intensity in the takeaway and instant retail sectors is expected to peak in Q3 2025, with a gradual easing of investment thereafter [4] Group 3: Competitive Landscape - Alibaba holds a competitive advantage in the market, while Meituan faces pressure due to a significant disparity in financial strength [5] - Meituan is projected to capture approximately 80% of industry revenue and 99% of industry profits in 2024, but new competition may lead to a decline in its revenue and profit share [5] Group 4: Stock Price Drivers - The narrative driving stock prices for some internet companies has shifted this year, with Alibaba focusing on cloud computing and AI, and Tencent Music transitioning to an ARPU-driven model [6] - Alibaba's cloud business is expected to be a core driver of revenue growth in the second half of 2025 [6] Group 5: AI Capital Expenditure - AI capital expenditure growth is expected to slow down but remain high, with Tencent's AI-related capital expenditure projected to increase by 152% in 2024, followed by a decrease to 25% and 20% in 2025 and 2026, respectively [7][10] - Alibaba plans to invest at least 380 billion yuan over three years starting March 2025, with AI capital expenditure expected to account for 65% of its total capital expenditure in the 2026 fiscal year [10] Group 6: Earnings Outlook - The investment intensity in takeaway and instant retail has peaked, with a 20% average downgrade in profit expectations for consumer internet companies over the past three months [12] - Major companies are expected to report varying earnings, with Tencent projected to have total revenue of 182 billion yuan and Alibaba expected to report 248 billion yuan [13][16] Group 7: Valuation and Market Sentiment - Despite a 20% downgrade in profit expectations for consumer internet companies, their average stock price has only declined by 4%, indicating potential for valuation recovery if profit downgrades have indeed bottomed out [17] - The digital entertainment sector has seen a 66% average stock price increase year-to-date, despite only a 3% upward adjustment in profit expectations, suggesting that short-term preferences are driving market behavior [17]

Core Viewpoint - Morgan Stanley suggests that the U.S. stock market may experience a phase adjustment in Q3, primarily due to the lagging impact of tariffs and the fluctuating policies of the Federal Reserve. However, the current bull market is not expected to end, with adjustments seen as opportunities for investment rather than a market termination [1][3][7]. Market Performance - Since the low in April, the S&P 500 index has rebounded over 26%. As Q3 approaches, concerns arise from weak non-farm employment data and inflation worries due to tariffs, leading to market uncertainty about the continuation of the bull market [3][4]. Bull Market Logic - The bull market's foundation is rooted in a V-shaped recovery of earnings revision breadth (ERB), which has rebounded from -25% in April to +10% currently. This indicator is crucial for confirming market bottoms and has historically led earnings surprise data [6]. Tariff Impact and Federal Reserve Policy - The impact of tariffs is expected to reflect in corporate earnings reports in Q3, particularly affecting consumer goods sectors with weak pricing power, while industrial firms that can pass on costs will be less affected. Labor market data adds to policy uncertainty, with the bond market pricing in an 88% chance of a Fed rate cut in September [9]. Earnings Growth and Fed Policy Outlook - Despite short-term risks, the outlook for the next 12 months remains bullish, supported by three main factors: increased certainty in earnings growth, with consensus predicting a 9% EPS growth for the S&P 500 in 2025 and 14% in 2026; the eventual shift in Fed policy towards rate cuts; and resilience in valuations and liquidity, with the S&P 500's dynamic P/E ratio remaining at reasonable levels [10].

Group 1 - Morgan Stanley's chief U.S. equity strategist Mike Wilson believes a bull market is forming in U.S. stocks, but the S&P 500 index may face a 5%-10% decline this quarter due to the impact of President Trump's trade policies on corporate balance sheets, which will provide an attractive entry point for investors [1] - The S&P 500 index recently reached a new all-time high, with a market capitalization increase of approximately $11.5 trillion in just a few months, following a brief bear market triggered by Trump's tariffs [1][2] - Wilson noted that the breadth of earnings revisions is improving, indicating that companies are effectively managing the challenges posed by tariffs [2][3] Group 2 - The third quarter is expected to be a concentrated risk period, as the effects of tariffs may start to impact product sales costs, but any market impact is anticipated to be temporary, with investors focusing on growth expectations for 2026 [3] - Recent strong retail sales data in June alleviated some concerns regarding consumer spending, supporting the positive outlook for the market [3] - Despite uncertainties surrounding the White House's trade plans potentially leading to short-term declines, the market is expected to continue its upward trajectory, having already bottomed out in April [5]

Group 1 - The core viewpoint is that despite improved sentiment in the U.S. stock market, it is premature to declare an all-clear signal, as key factors supporting the rebound have not fully materialized [1] - Morgan Stanley's strategist Michael Wilson identifies four key factors for the U.S. stock market's rebound: optimism over a trade agreement with China, stable earnings expectations, a more dovish stance from the Federal Reserve, and a ten-year Treasury yield below 4% [1] - The ten-year Treasury yield has exceeded 4.4%, and Morgan Stanley believes that a yield above 4.5% will pose a valuation challenge [1] Group 2 - The U.S. Department of Commerce announced that the U.S. and China have canceled a total of 91% of tariffs, which has led to a rise in S&P 500 futures and risk assets [1] - During the earnings season, tariff issues have been a focal point for companies, with a record number of mentions in earnings calls, leading about 30 companies to withdraw or suspend earnings guidance due to tariff uncertainties [2] - The S&P 500 index has broken through the previous resistance level of 5500 points and returned to the range of 5500-6100 points, with the next significant technical test being the convergence of the 200-day and 100-day moving averages at 5750-5800 [2]

Core Viewpoint - The article discusses the potential challenges facing the stock market due to downward revisions in earnings forecasts, particularly in the context of uncertain trade policies and weakening economic indicators [4][5]. Group 1: Earnings Forecasts - Morgan Stanley's chief strategist indicates that even if corporate earnings in Q1 2025 exceed expectations, downward revisions in earnings per share (EPS) forecasts may still suppress stock market performance [4]. - Recent data shows that weekly earnings revisions in the US and Europe have turned negative and deteriorated rapidly, which historically correlates with a contraction in price-to-earnings (P/E) ratios [5]. Group 2: Economic Indicators - The article highlights a decline in the global Purchasing Managers' Index (PMI) and a decrease in the new orders to inventory ratio, suggesting that companies are becoming more cautious about their outlook [5]. - After recent forecast adjustments, the S&P 500's Q1 earnings are expected to decline by 8% quarter-over-quarter, significantly exceeding the typical seasonal decline of 1% [6]. Group 3: Sector Recommendations - The strategist recommends investors shift towards defensive sectors to mitigate risks, especially as bond yields may decline [6]. - Concerns are particularly pronounced for cyclical and export-oriented stocks, while commodity stocks may outperform due to higher earnings forecasts compared to spot prices [6]. Group 4: Regional Performance - The article notes that European stocks may show relative strength compared to US stocks for the first time in two years, as the gap in earnings performance between the two regions narrows [6].