Morgan Stanley's Slimmon says 2027 EPS estimates key for markets

Investors should focus on 2027 earnings-per-share estimates as the key metric for equity markets, according to Morgan Stanley Investment Management's Andrew Slimmon.

"2027 EPS estimates are the key number to watch for markets," Slimmon, managing director and senior portfolio manager at Morgan Stanley Investment Management, said July 28.

He advised investors to be "a little more cautious" when allocating between U.S. and Asian equities, as the AI trade becomes increasingly correlated across regions. The guidance follows a period where AI anxiety triggered broad selloffs in Asian markets, with tech stocks falling in tandem with their U.S. peers.

For portfolio managers, the rising cross-border correlation means geographic diversification may offer less protection during AI-driven selloffs. The focus on 2027 estimates pushes the investment horizon beyond near-term earnings cycles, potentially favoring companies with visible long-term AI revenue streams over those riding thematic momentum.

U.S. and Korean tech stocks have become tightly linked as AI-related names drive synchronized moves in both markets, according to recent analysis. That linkage could become a source of concern for investors who rely on regional allocation to manage risk, as a selloff in one market can quickly transmit to the other. The correlation has intensified as supply chains and end markets become more interconnected, with Nvidia Corp.'s revenue exposure to Asian data center builders and Korean memory chip makers' dependence on AI demand from U.S. hyperscalers creating a two-way transmission channel for stock moves.

Slimmon's emphasis on 2027 EPS estimates suggests that current market pricing may not fully reflect earnings power two years out. If those estimates prove conservative, the risk of multiple compression diminishes. If overly optimistic, the downside could be significant for richly valued AI names that have led the bull market. The focus on a 2027 horizon also implies that near-term earnings volatility may be less relevant for long-term positioning decisions.

For Asia-exposed portfolios, the risk is that AI-related earnings upgrades have already been priced in, leaving limited room for positive surprises. Korean and other Asian tech stocks that have rallied alongside U.S. AI leaders could face outsized corrections if AI demand signals weaken or if trade tensions disrupt the semiconductor supply chain. Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and SK Hynix Inc. are among the Asian names most exposed to the AI trade's direction.

The call for caution on U.S. versus Asia allocation comes at a time when global equity correlations have risen, reducing the diversification benefit of holding both regions. For active managers, this means stock selection within sectors may matter more than geographic allocation in generating excess returns.

The guidance from a senior Morgan Stanley voice carries weight given the firm's significant presence in both U.S. and Asian equity markets. Investors will watch upcoming earnings seasons for confirmation of whether 2027 estimates are achievable, with the next major test coming in the third-quarter reporting cycle.

This article is for informational purposes only and does not constitute investment advice.