Morgan Stanley analysts stated that utility stocks are well-positioned for Joe Biden's infrastructure package.In the second half, earnings normalization will likely be the prevailing theme.While the infrastructure bill could cause earnings normalization to be disrupted, it would be a boon for utilities in a large way.Subscribe to our daily newsletter 10 Things Before The Opening Bell.Morgan Stanley analysts said Monday that while utility stocks are well-positioned for Joe Biden's infrastructure package, other factors could impact the sector.Analysts wrote that the infrastructure plan of Biden would double the benefits to utilities. Additional funding for clean energy construction will directly increase bottom line. In relative terms, utilities could have a greater ability to pass on corporate tax increases used to fund infrastructure. This could lead to higher stock performance.Analysts wrote that good news could be coming from energy stocks' earnings. Even if it does, it will likely worsen over the second half. Morgan Stanley analysts downgraded energy stocks to underweight, despite the fact that many people have been optimistic about them.However, utilities stocks' earnings are performing below the long-term average. This suggests that normalization could push share prices higher. Analysts wrote that a potential bill on infrastructure could disrupt earnings normalization but would be a boon for utilities in disproportionate ways.Morgan Stanley's quantitative modeling of earnings uses earnings revision breadth to support this outlook. This refers to the ratio between companies that adjust future profits upwardly and downwardly. A rising earnings revision breadth is often a sign of forward-looking optimism about profits.Analysts wrote that earnings revision normalization will likely be the prevailing theme in the second half. The key drivers that drove markets in the first half of the year - such as post-pandemic recovery, stimulus checks and the "crypto wealth" effect - are what they argue. These effects will abate once the economy returns to normal.Analysts wrote that the current market cycle has an important dynamic: Companies who exceed earnings expectations are matched by the market. Companies who miss earnings are not published. Companies that missed earnings in the first quarter underperformed the market by 4.4%. However, those that exceeded expectations performed well by 0.2%, another indicator that most good news is being priced in.
