Investing.com -- Morgan Stanley downgraded its view on the North American freight transportation sector to "In-Line" from "Attractive", arguing that while the industry's cyclical recovery is strengthening, much of the upside has already been reflected in stock prices amid record valuations.

The brokerage said it has become even more optimistic about the underlying freight upcycle, adopting what was previously its bullish scenario as its new base case. It raised earnings estimates and price targets for most companies under coverage, citing tightening trucking capacity, improving pricing and signs of recovering demand. However, it warned that the debate has shifted from whether the recovery is real to how high earnings can ultimately climb and whether current gains can be sustained over the long term.

Morgan Stanley said key freight indicators, including truckload freight indices, shipper sentiment and spot truck rates, have reached record levels, but demand remains less certain than supply. The firm believes the industry is only in the early stages of a demand recovery, leaving macroeconomic conditions and freight volumes as the key determinants of how long the upcycle lasts.

Despite its constructive industry outlook, the brokerage said transportation stocks have climbed roughly 50% since late 2025, pushing valuations to all-time highs and reducing the margin for further gains. It warned that freight stocks historically begin to weaken even as earnings surprises improve because valuations become harder to justify.

Reflecting that view, Morgan Stanley downgraded Old Dominion Freight Line to Equal-weight from Overweight, J.B. Hunt Transport Services to Underweight from Equal-weight and Landstar System to Underweight, while raising price targets for most stocks in its coverage universe. It said the downgraded companies now offer less attractive risk-reward profiles after sharp share price gains.

The brokerage continues to favor truckload carriers, selected less-than-truckload operators and Canadian railroads, arguing these businesses remain best positioned to benefit from tightening industry capacity and an eventual recovery in freight demand.

Looking ahead to second-quarter earnings, Morgan Stanley said management commentary will be more important than quarterly results, with investors focused on pricing trends, contract negotiations and demand outlook rather than near-term earnings. It expects 11 companies to beat expectations, one to miss and 11 to report results broadly in line with consensus.