Investing.com -- Morgan Stanley sees the recent equity market correction as a digestion of peak rates of change in earnings revisions and liquidity, arguing that the pullback supports a broadening of market leadership toward under-owned cyclical sectors including Consumer Discretionary, Transports, and Regional Banks.

Strategist Michael Wilson told investors in a note that the correction, led by memory stocks, is "primarily about the peak rate of change in earnings revisions breadth (ERB) for many leading stocks and liquidity."

He characterized such transitions as normal during earnings bull markets, particularly explosive ones, adding that "the earnings bull market remains intact" as NTM EPS estimates are likely to keep rising through year-end.

Morgan Stanley’s preferred cyclical subgroups have already begun to outperform, with Consumer Discretionary Goods, Transports, and Regional Banks up 9%, 13%, and 8%, respectively, over the past month, versus a 1% decline in the S&P 500 over the same period.

Despite this, the firm noted sentiment and positioning across these groups "remains bearish and muted."

For Consumer Discretionary Goods, Morgan Stanley pointed to a wallet share shift from services to goods, with goods pricing at 4.5% now outpacing services pricing for the first time since 2022, while earnings revisions breadth has risen to +12% from -9% two months ago.

Transports earnings revisions breadth has reached 40%, "the strongest in four years," supported by stabilizing volumes and pricing.

Regional Banks are seen benefiting from strengthening commercial and industrial loan growth and a broader business cycle reacceleration, with the ISM Composite Index improving to 54.5.

Morgan Stanley added that the contribution of rates, crude, and the dollar to equity performance "may now be peaking from a statistical standpoint," which should further support broader market leadership.