Morgan Stanley Says Firms Are Focused on Costs Like Never Before

US companies are discussing cost control on earnings calls at a record rate, amid a push to reallocate funds and invest in new technologies, according to an analysis by Morgan Stanley strategists.

Transcript mentions of “operational efficiency” are at the highest ever in the US during this earnings season as companies focus on expense discipline, but also invest in technologies “that can drive future productivity like AI,” a team led by Michael Wilson wrote in a note.

There is a notable overlap among the industries discussing operational efficiency most prevalently and those that are discussing AI, the strategists said. These groups include software, professional services, health care services, and financial services.

Source: Bloomberg

Pfizer Inc., BlackRock Inc., and Lam Research Corp. were among S&P 500 companies touting operational efficiency in their earnings calls this season, according to data compiled by Bloomberg.

The rising focus on cost control comes as firms position to protect margins amid hopes for a soft economic landing. Investors have looked for signs of cooling in the jobs market to gauge when the Federal Reserve will lower borrowing costs, although recent hot data has signaled the Fed won’t be easing anytime soon.

Managing expenses has been a key theme this season. Walt Disney Co. said profit this year will rise at least 20% thanks to cost cutting. Hertz Global Holdings Inc. is looking to reduce costs and Levi Strauss & Co. said a new initiative to boost efficiency will include cost-cutting operations like eliminating jobs.

Some companies are reallocating these funds to grow their business. Estée Lauder Cos. is cutting jobs as part of a revamp plan to allow it to respond more quickly to new beauty trends and invest more in its brands. Meta Platforms Inc. is spending aggressively on artificial intelligence advancements while Amazon.com Inc. will be cautious about new investments.

Recent earnings calls also emphasized “the temporary nature of certain cost problems,” and some expectations of recovery in the latter half of the year, according to a separate note from RBC Capital Markets strategist Lori Calvasina.

On the artificial intelligence front, all eyes will be on Nvidia Corp. which is expected to report later this month. So far this season, Arm Holdings Plc soared as artificial intelligence spending helped bolster the chip designer’s forecast. Palantir Technologies Inc. also benefited from big demand for its AI technology.

The bar is high for Nvidia, which has been the biggest beneficiary of the AI trend. Analysts estimate earnings-per-share will rise 602% in its fiscal quarter ending Jan. 31 from a year ago. The Magnificent Seven group of megacap tech stocks including Nvidia need to deliver stellar earnings to keep outperforming the broader market, according to various strategists.

Read more: Nvidia CEO Says Tech Advances Will Keep AI Cost in Check

Morgan Stanley’s Wilson recently listed Nvidia, Apple Inc., Microsoft Corp. and Alphabet Inc. among a screen of high-quality growth stocks that have overweight ratings from the bank’s analysts. He’s constructive on this group of quality stocks, as well as those delivering high operational efficiency as an extension.

(Updates with RBC comments in eighth paragraph.)

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David Watkins

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