Morgan Stanley adjusts European sector ratings, downgrades software stocks and upgrades energy stocks

Investing.com - Morgan Stanley downgraded European software stocks to “Reduce” on Monday and upgraded energy stocks to “Overweight,” reshaping its European stock model covering 30 sectors amid accelerating AI disruption and Middle Eastern oil risks.

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The software sector dropped from 8th to 24th place, while the energy sector rose from 9th to 4th. The semiconductor sector moved from 2nd to the top spot, with a combined model score of 65.7 points.

The US bank acknowledged previous errors in its software sector model. Morgan Stanley strategist said, “In our model update in May 2026, our sustainability factor began signaling through the accruals factor of heavyweight company SAP, indicating that the outperformance of the European software sector would at least pause — but we made the mistake of suppressing that signal at the time.”

The software sector is currently at the 0th percentile in both consensus target price revision breadth and 12-month momentum indicators. Half of the sector’s weight is in the bottom fifth in management sentiment score changes.

Regarding the energy sector, the firm explicitly stated that its upgrade was not based on geopolitical judgments. The strategist wrote, “Our upgrade is not a judgment on the Middle Eastern geopolitical trajectory but anticipates that, under various scenarios in Iran, the EU energy sector will continue to carry geopolitical risk premiums.” The energy sector ranks at the 100th percentile in oil price correlation, with a 5% weight in the model.

The telecom sector was upgraded to “Slight Overweight,” moving from 16th to 8th place. The media and entertainment sector was downgraded from equal weight to Reduce, falling from 10th to 26th. The diversified financial sector was downgraded from “Overweight” to “Equal Weight.” The food and beverage sector was upgraded from “Reduce” to “Equal Weight.”

German utility company RWE AG was selected as the top stock, rising from 26th to 1st in the comprehensive screening. Analyst Robert Pulleyn maintained an “Overweight” rating with a target price of €60, compared to the March 9 share price of €52.6. Other top picks include ASML, ENGIE, Société Générale, Siemens Energy, United Credit Group, ArcelorMittal, National Grid, and Anheuser-Busch InBev.

Since its launch in January 2024, the model’s top and bottom stock screens have achieved a 49% return relative to the MSCI Europe Index on a pre-trade basis. Since launch, the top screen outperformed by 16%, while the bottom screen underperformed by 22%.

Morgan Stanley cited METR benchmark data showing that Claude Opus 4.6 takes about 14-15 hours for independent software tasks, whereas models in the 2020s take less than 1 hour, demonstrating the nonlinear growth of AI capabilities. A next-generation model based on 10 times the current computing power is expected to be launched between April and June 2026.

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