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Investing.com -- Morgan Stanley expects the life science tools and diagnostics sector to enter 2026 on firmer footing, with early signs of demand recovery, clearer policy visibility, though a sharp valuation rebound in late 2025 leaves the industry fairly priced.
The bank assumed or initiated coverage on tools, diagnostics companies, maintaining an In Line view on the group. It said industry growth will remain below historical levels next year, but downside risks look more limited than in prior periods as budgets stabilise and customer demand becomes more predictable.
Its top pick is Danaher. Morgan Stanley said the company’s end markets, competitive position and reset expectations for 2026 support a more constructive stance relative to peers, with valuation offering room for upside.
The bank said momentum that built through the second half of 2025 should carry into next year, helped by post COVID inventory clearance, lighter than feared US tariff changes and steadier US academic funding.
It said management teams are now guiding more conservatively than in past cycles.
Precision oncology, bioprocessing and clinical stage CROs are expected to lead growth, while headwinds linger in academic and government spending, China diagnostics and emerging biopharma.
Morgan Stanley remains optimistic on demand for core tools outside the academic sector.
The bank highlighted new survey work showing lab budgets rising in 2025 and expected to grow again in 2026, with higher spending on liquid and gas chromatography and mass spectrometry platforms.
It said Agilent and Thermo Fisher show the strongest instrument positioning. In oncology testing, it expects blood based genomic profiling to continue gaining share and sees rising use of minimal residual disease assays.
A survey of R&D executives pointed to stronger outsourced research spending in 2026, supporting a positive outlook for CROs. Morgan Stanley said Charles River and IQVIA remain the sector’s preferred preclinical and clinical partners.
The bank said valuation multiples now better reflect the improving backdrop, supporting its In Line stance, with opportunities more evenly spread across the sector than in previous years.