Freight transportation sector results for Q2 are expected to be significantly better than feared three months ago, helped by stronger-than-expected volumes in the second half of the quarter and the absence of a predicted demand cliff, Morgan Stanley said in a note Monday.

However, the firm said results "will still not be good enough for investors who will seemingly accept nothing short of a high-quality, sustained upcycle." It expects earnings calls to focus more on tone and macro commentary than on quarterly fundamentals.

While full-year guidance is unlikely to be reinstated across the board, the firm said strong commentary on July trends and signs of resilience in H2 could help attract investor interest back to a sector that remains underowned and is still trailing the broader market.

Truckload carriers will be watched to assess how much they benefited from the May rebound in spot rates, while less-than-truckload operators enter earnings with relatively low expectations. For railroads, better-than-expected Q2 volumes may be offset by headwinds from mix, fuel and costs, Morgan Stanley said.

Knight-Swift (KNX) could post an upside surprise after modeling a recession into its Q2 guide, while Canadian National Railway (CNR) and Canadian Pacific Kansas City (CP) may face scrutiny over full-year guidance. Union Pacific (UNP) is also expected to draw attention for management's commentary on recent merger speculation in the rail sector.

The firm cut its price target on Canadian National to CA$191 from CA$195 and lowered its target on Union Pacific to $215 from $220.

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