Morgan Stanley is pointing investors toward international markets, specifically Japan and Europe, as opportunities for growth beyond the saturated U.S. equity landscape. In a recent interview with CNBC, senior portfolio manager Andrew Slimmon outlined the fundamental shifts that are making these regions increasingly appealing.
Historically, both Japanese and European stocks have lagged behind Wall Street, often due to disappointing corporate profitability. However, Slimmon notes that a significant change is underway. Robust upward earnings revisions are rapidly transforming the narrative, with corporate profit margins expanding and valuations remaining attractive relative to U.S. peers.
Japan's Earnings Momentum
Japan's stock market is demonstrating notable strength in 2026, breaking away from years of structural underperformance. The benchmark Nikkei 225 has surged roughly 25% year-to-date, fueled by a wave of corporate earnings upgrades. During the second quarter, Japanese listed firms posted a staggering 69% year-on-year aggregate profit growth, comfortably outstripping consensus expectations.
Corporate governance reforms, persistent yen weakness, and corporate pricing power are enabling Japanese exporters and domestic firms to raise forward earnings guidance. Slimmon pinpointed these structural upgrades as the underlying factors propelling Japanese stocks forward. "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," he wrote.
Europe's Banking Sector Shines
Across the Atlantic, European stocks are also proving that their fundamental backdrop extends far beyond sluggish macroeconomic headlines. While the defense sector has attracted significant investor interest amid elevated global geopolitical spending, the EU banking industry has quietly emerged as an exceptional performer. Boosted by sustained interest margins and resilient credit demand, the STOXX Europe 600 Banks index has gained nearly 19% year-to-date.
Broad European earnings-per-share are on track to expand by approximately 15% across full-year 2026, driven by corporate cost discipline and steady upward revisions. "And also Europe and defense is one industry, but it's not the only industry. Look at the banks; they've done very, very well," the Morgan Stanley expert noted.
Earnings Power vs. Market Lag
The defining divergence between 2026 and prior market cycles lies in how stock prices are responding to underlying corporate growth rather than macro sentiment alone. In contrast to the top-heavy U.S. market, where narrow market breadth driven by mega-cap tech names has left the broader index treading water near May levels, international stocks are steadily building momentum on earnings strength.
Even as central banks like the Federal Reserve adjust benchmark interest rates, corporate profit upgrades continue to climb higher. This growing disconnect between stagnant index prices and rising fundamentals offers a prime setup for global stock pickers. "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," Slimmon concluded, adding that markets will really take off as investors appreciate the underlying earnings story.
This article is for informational purposes only and does not constitute financial advice.
