Morgan Stanley's top picks for the rest of earnings season

Morgan Stanley anticipates a rally in several stocks during the ongoing Q3 earnings season, noting that over 80% of companies reporting so far have beaten estimates and elevated stock-specific risk creates a favorable environment for active stock-picking. The firm's top picks include Atlassian, driven by strong demand for its app development tools and cloud migration strategy; Meta Platforms, benefiting from user engagement and advertising growth; and Southwest Airlines, poised for gains due to its ongoing business overhaul and operational efficiency enhancements.

Analysis

Morgan Stanley anticipates a rally in several stocks as the Q3 earnings season progresses, noting over 80% of reporting companies have already surpassed Wall Street's revenue and EPS estimates. This strong performance, coupled with a dearth of downward earnings revisions, suggests companies are confident in meeting or exceeding expectations. Elevated stock-specific risk, highest since 2020, creates a favorable environment for active stock-picking.

Morgan Stanley's top picks include Atlassian (TEAM) and Meta Platforms (META), both rated Overweight. Atlassian is expected to benefit from growing demand for app development tools and its strategic cloud migration by 2029, despite recent stock underperformance (down >14% in 3 months, ~31% YTD). Meta Platforms is projected for continued growth from user engagement, advertising revenue, and GPU-enabled improvements across its app ecosystem, with a significant $850 price target, having risen about 25% in 2025.

Southwest Airlines (LUV) is highlighted with a $38 price target, poised for gains from ongoing business overhauls and operational efficiency improvements. These include reduced turn times, new red-eye flights, and cost-cutting measures. Despite a 15% rise over the past year, tactically cautious investor sentiment could amplify gains upon a strong earnings beat or positive guidance.

Key Decisions for Investors

• Investors should consider increasing active stock-picking strategies given the elevated stock-specific risk and high Q3 earnings beat rate, focusing on companies with strong fundamentals.
• Evaluate Morgan Stanley's highlighted picks—Atlassian (TEAM), Meta Platforms (META), and Southwest Airlines (LUV)—for potential long positions, considering their distinct growth drivers and operational catalysts.
• Monitor upcoming Q3 earnings reports and forward guidance closely for signs of sustained positive momentum, particularly for companies demonstrating operational efficiencies or strategic shifts.
• Assess the execution of specific company initiatives, such as Atlassian's cloud migration or Southwest's operational overhauls, as these are key to realizing the projected upside.