CME Group (CME), Nasdaq (NDAQ), and Miami International (MIAX) are viewed as defensive picks among exchanges, while Charles Schwab (SCHW) and LPL Financial (LPLA) are preferred within brokers, with Q1 earnings expected to modestly beat consensus on higher volumes and volatility, Morgan Stanley said in a note Friday.

The investment firm said it lifted Q1 EPS estimate for exchanges and brokers by 6% on average, putting them 1% above consensus on a median basis, while 2026 and 2027 forward estimates were lowered, leaving them below consensus.

Exchanges served as defensive safe havens in Q1 amid artificial intelligence disruption concerns, while the Middle East conflict boosted volumes, the firm said, adding that CME is seen as best positioned to gain from sustained rate volatility, Nasdaq offers upside from capital markets recovery, and MIAX is viewed as a pure-play on ongoing options adoption.

Morgan Stanley said it sees growing demand for liquid hedging tools, and a structural volume growth outlook supported by innovation across prediction markets, short-dated options, extended trading hours, tokenization and stablecoins.

On the other hand, shares of the brokers were a bit weaker in Q1, driven by AI disruption risk and concerns around sustainability of advisor fees and cash sweep monetization, according to the note.

The firm said it continues to favor Charles Schwab and LPL, given "durable" growth catalysts and compelling valuation relative to earnings growth through 2027.

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