Unlocking Hidden Gems: How AI and Earnings Surprises Are Reshaping Tech and Infrastructure Investments

In a market increasingly dominated by the "Magnificent 7" and passive index strategies, Morgan Stanley's latest research offers a compelling counter-narrative: the power of active stock-picking and AI-enabled growth. As the S&P 500's top 10 stocks now command over 34% of its market cap, investors are being urged to look beyond the crowd. The firm's proprietary Earnings Surprise Composite (ESC) score—a blend of earnings forecasts, quality, and growth potential—has identified three standout opportunities in tech and infrastructure. These stocks, poised to outperform, leverage AI to drive earnings momentum while trading at valuations that suggest untapped upside.

The Earnings Surprise Composite: A New Lens for Active Investing

Morgan Stanley's ESC score is a quantamental tool that merges quantitative data with fundamental insights. It prioritizes companies with strong earnings momentum, robust cash flow visibility, and AI-driven operational efficiencies. The firm's Global Investment Committee emphasizes that in a top-heavy market, active strategies—focusing on the "other 493" S&P 500 stocks—can outperform passive benchmarks. This is particularly true for sectors like tech, infrastructure, and energy, where AI integration is accelerating productivity and monetization.

Snowflake (SNOW): The AI-Driven Data Powerhouse

Snowflake leads Morgan Stanley's list with an ESC score of 0.97, the highest among its peers. The company's recent fiscal Q1 2025 results—marking its first $1 billion sales quarter—underscore its momentum. Snowflake's AI integration, unveiled at its 2025 Summit, is transformative. Features like Snowflake Intelligence (a conversational AI interface for data querying) and Cortex AISQL (which enables unstructured data analysis) are democratizing access to enterprise data.

Despite a P/E ratio of 0.00 (due to ongoing losses), Snowflake's PEG ratio of 8.9 suggests the market is pricing in aggressive growth. With AI adoption accelerating across industries, Snowflake's role as a central hub for data analytics positions it to capitalize on long-term demand. Investors should note its August 27 earnings report, where a positive surprise could catalyze further gains.

Cisco Systems (CSCO): AI Infrastructure's Quiet Workhorse

Cisco, with an ESC score in the top quintile, is another standout. The firm's valuation multiple of 5.2x (above its 5-year average of 4.6x) reflects growing demand for AI infrastructure. Enterprises are pouring capital into modernizing networks and data centers to support AI workloads, and Cisco's Catalyst 9000 switches and Umbrella cloud security platform are central to this shift.

Morgan Stanley analyst Meta Marshall maintains an Overweight rating and a $70 price target, implying a 3.7% upside. While Cisco's stock has already risen 14% YTD, its role in enabling AI-driven enterprises—particularly in hybrid cloud and edge computing—suggests further re-rating potential.

Pinterest (PINS): AI-Driven Engagement and Monetization

Pinterest's recent upgrade to Overweight by Morgan Stanley highlights its AI-driven turnaround. The platform's GPU-enabled investments have boosted engagement metrics and ad revenue, with improvements in personalized content and shopping features. Analyst Brian Nowak notes that Pinterest's AI monetization is now "accelerating," with second-half 2025 earnings poised to reflect this shift.

Pinterest's P/E ratio of 83.71 appears high, but its PEG ratio (though not explicitly stated) likely reflects optimism about AI-driven growth. As social media platforms increasingly rely on AI for user retention and ad targeting, Pinterest's focus on visual discovery and e-commerce integration could unlock new revenue streams.

Strategic Implications: Diversifying Beyond the Magnificent 7

Morgan Stanley's research underscores a broader theme: AI is not just a buzzword but a productivity multiplier. From Snowflake's data analytics to Cisco's infrastructure and Pinterest's engagement tools, these companies are leveraging AI to drive earnings surprises. However, the firm warns of market extremes—overvaluation of top-tier stocks and underappreciated opportunities in energy, industrials, and international equities.

For investors, the key is balancing exposure to AI-driven growth with diversification. Morgan Stanley recommends a "quantamental" approach, combining ESC scores with macroeconomic signals like corporate tax cuts and energy sector tailwinds. ConocoPhillips (COP) and Walmart (WMT), for instance, are highlighted as beneficiaries of shifting U.S. policy dynamics.

Final Take: Buy the Disruption, Not the Hype

The market's current obsession with the Magnificent 7 has created a vacuum of opportunity. Snowflake, Cisco, and Pinterest represent a new wave of AI-enabled growth, with valuations that still appear attractive relative to their potential. While risks like AI monetization challenges and market volatility persist, the upside for these stocks is compelling.

For those seeking immediate buy opportunities, the message is clear: active management and AI integration are the new cornerstones of outperformance. As Morgan Stanley's research shows, the future belongs to companies that can surprise on earnings and scale AI-driven value.

Investment Action Plan
1. Snowflake (SNOW): Buy ahead of its August 27 earnings report, targeting a breakout above its 52-week high.
2. Cisco (CSCO): Accumulate on dips as AI infrastructure spending accelerates, with a long-term price target of $70.
3. Pinterest (PINS): Position for a post-earnings rally, leveraging its AI-driven monetization tailwinds.

In a world where AI is reshaping industries, the stocks that surprise on earnings—and deliver real growth—are the ones to watch.