Morgan Stanley Says Investors Should Look Beyond U.S. Stocks. Here’s Where It Sees Opportunities.

Investors looking beyond U.S. stocks are finding stronger corporate earnings in Japan and Europe, where companies in sectors ranging from banking to defense have helped broaden opportunities outside Wall Street.

Morgan Stanley senior portfolio manager Andrew Slimmon pointed to rising earnings estimates as a major factor behind the performance of Japanese equities this year, while European companies have also recorded stronger results, he told CNBC's Squawk Box.

"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.

European markets have also benefited from stronger corporate results, with Slimmon highlighting banks and defense companies. Second-quarter earnings for companies in the STOXX 600 rose 24.1%, the strongest growth since 2022, while the benchmark had gained about 13% for the year as of late August.

Banks have been among the stronger-performing parts of the European market after years of restructuring and improved profitability. European Central Bank Vice President Boris Vujcic said last week that the region's banks remain competitive with their U.S. counterparts in areas including profitability and liquidity, although they remain smaller in some businesses and spend less on technology. European Union officials have also been discussing efforts to deepen capital markets and remove barriers to cross-border banking consolidation.

Defense stocks have drawn attention as European governments increase military spending following Russia's war in Ukraine and broader security concerns across the region. Slimmon said defense was one area of strength in Europe but emphasized that the gains were not limited to the industry.

Recent trading has shown how quickly geopolitical developments can affect European equities. The STOXX 600 fell to a three-month low earlier this month as higher oil prices and bond yields increased inflation concerns, with disruptions linked to the war in Ukraine and attacks on energy infrastructure in the Gulf adding pressure to energy markets.

Japan has been navigating higher interest rates alongside the improvement in corporate results. The Bank of Japan raised its policy rate by a quarter percentage point to 1.25% on Sept. 18, its highest level in 31 years, while the yen weakened after the decision as traders assessed the central bank's guidance. The dollar rose as much as 1.3% against the yen that day, reaching a two-week high of 158.05 yen.

Slimmon said the relationship between corporate results and stock performance has been noticeably different this year from previous periods when Japanese and European equities frequently appeared inexpensive compared with U.S. shares but struggled to meet investors' earnings expectations.

"Stocks are responding to the underlying growth revealed by companies' earnings revisions," he told CNBC, describing that as a key difference in 2026.

U.S. stocks remain part of Morgan Stanley's outlook despite concerns over the concentration of market gains among a relatively small number of large companies. Slimmon said narrow market breadth does not necessarily signal weakness when corporate earnings continue to improve.