Corporate "upward guidance" surges as Wall Street indulges in a narrative of perfect recovery.

Corporate executives are sending out the strongest signals of optimism seen in recent years, raising their performance guidance and reducing the use of words like "cautious."

According to Zhui Feng Trading Desk, based on Morgan Stanley’s latest report released on December 1, an analysis of corporate earnings calls from the third quarter of 2025 shows that the frequency of mentioning “raise guidance” has surged, while mentions of “cautious” have dropped sharply.

Companies are shifting from passively responding to proactively managing macro challenges. The report notes that most companies have successfully mitigated tariff impacts through diversified sourcing and cost pass-through. Meanwhile, with provisions for R&D expense deductions and accelerated depreciation, companies' free cash flow has improved.

All these positive factors are supporting Wall Street’s optimistic outlook. Morgan Stanley predicts that the average company’s profits will see their first significant growth in four years in 2026, with full-year EPS expected to rise by 17%. Robust revenue growth, broad-based earnings revisions, and efficiency gains from AI are collectively driving a broader market recovery.

Corporate Confidence Reversal: From "Cautious" to "Guidance Raise"

This shift in corporate sentiment is backed by concrete data. Morgan Stanley cites AlphaSense’s analysis, showing that in the latest earnings season, mentions of "raise guidance" have sharply increased in US listed company earnings calls, while the frequency of "cautious" has dropped to a low. This stark contrast vividly outlines the return of management confidence.

This optimistic sentiment is reflected in broader earnings expectations. The report shows that the S&P 500’s earnings revision breadth is moving upward, and the EPS growth rate for the median company in the Russell 3000 index is showing strong recovery. Morgan Stanley strategists say they are "encouraged" by these signals.

Apart from internal operational improvement, the report highlights that the “Big Beautiful Act” enables R&D expenses to be deducted directly and allows accelerated depreciation, lowering companies’ current cash tax rates. This positive impact began in Q3 2025 and is expected to last through 2026. Morgan Stanley believes that cash flow growth will “support the market’s expansion in 2026.” For example, AT&T noted in its financial report that part of the savings from cash tax payments was used to fund its employee pension plan.

The report also says that US companies have been “generally successful” in mitigating tariff impacts. Measures include using pricing power, forex hedging, shifting products to non-tariff markets, stockpiling inventory, and diversifying supply chains.

Data shows that mentions of “tariffs” in earnings calls have peaked and begun to decline. Some companies have not only fully offset the negative impact of tariffs, but even exceeded market expectations when tariff rates were lower than expected. For example, General Motors stated that it had completely offset the impact of tariffs through multiple measures. Morgan Stanley’s analysis indicates that successful tariff management has set a more favorable performance baseline for companies in 2026.

AI: From Concept to Productivity

Artificial intelligence is shifting from a hot concept to a practical productivity tool. The report shows that mentions of “AI,” “efficiency,” and “productivity” in earnings calls have hit new highs. AI applications are becoming a key force driving corporate profit margin expansion.

According to the report, some companies already have AI-centric businesses driving revenue growth. But the more common use cases remain in automating repetitive tasks and deep data analysis. For instance, Bank of America revealed that its 17,000 programmers are using AI coding technology, saving 10% to 15% in costs. Morgan Stanley predicts that AI-driven efficiency will contribute about 30 basis points to S&P 500 net profit margin in 2026, and 50 basis points in 2027. Many companies say they are still in the “early stages” of leveraging AI to boost productivity, signaling huge potential for the future.

Overall, the macroeconomic environment facing companies is stabilizing and is no longer a source of new shock. The report finds that although mentions of “cost pressure” and “margin pressure” still exist, companies are “successfully managing” these challenges. Meanwhile, discussion about “inflation” is flat with last quarter, indicating that CPI and PPI are entering a stable period.

The labor market is also showing a "net neutral" stance. Although mentions of "hiring" and "layoffs" are edging up together, there’s no sign of sharp imbalance, and concerns about rising labor costs have eased.

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The above highlights are from Zhui Feng Trading Desk.

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