3 Investment Banks to Buy on the Revival of Capital Markets

Given the revival in corporate debt and equity issuances and deal-making activities, the Zacks Investment Bank industry is expected to witness a turnaround in investment banking fees in the quarters ahead. Clarity on several macroeconomic factors will also keep up the momentum.

Heightened client activity and a rise in trading volume will support the trading business in the near term. While costs related to technological upgrades might impede the bottom line, industry players will witness improved operating efficiency. Hence, investment banks like Morgan Stanley MS, The Goldman Sachs Group, Inc. GS and Raymond James Financial, Inc. RJF are worth betting on.

Industry Description

The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).

3 Major Themes to Influence the Investment Bank Industry

Resurgence in Underwriting and Advisory Businesses: After a prolonged weakness in underwriting, IPOs and deal-making activities since 2022 due to geopolitical tensions and global macroeconomic concerns, advisory and underwriting businesses have revived, with the deal pipeline looking healthy. With the macroeconomic environment steadying due to the interest rate-cutting cycle globally and growing optimism for a soft landing of the U.S. economy, underwriting and M&A activities are on a path to a sustained recovery in the coming days.

Though the ride will likely be bumpy for investment banks in the near term, given the U.S. presidential elections and growing unrest in the Middle East, the improving operating backdrop will support the industry players’ top-line growth.

Trading Business to Remain Solid: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. Though there has been some stability in the macroeconomic backdrop of late as inflation is cooling down, markets continue to grapple with relatively higher interest rates and other geopolitical matters. Also, the upcoming U.S. presidential polls will likely lead to heightened client activity and improved volatility. So, the trading desks are expected to keep witnessing a flurry of activity in the near term. Hence, investment banks are expected to report solid trading income in the upcoming period.

Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising will likely aid the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to help clients with infrastructure development and new platforms. While the industry players are likely to face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Investment Bank industry is a 20-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #39, which places it in the top 16% of more than 245 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a weak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 7.7% upward.

Before we present a couple of stocks that you may want to invest in, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While stocks in the industry have collectively surged 62.2%, the S&P 500 composite has rallied 39.3% and the Zacks Finance sector has risen 37.3%.

One-Year Price Performance

Industry Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 2.64X, above the median level of 2.08X, over the past five years. The industry is trading at a considerable discount compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 15.10X and the median level is 13.87X.

Price-to-Tangible Book Ratio (TTM)

Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 5.13X and the median level of 4.44X for the same period are above the Zacks Investment Bank industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)

3 Investment Banks to Buy Now

Morgan Stanley: This Zacks Rank #2 (Buy) stock operates globally as an investment banking, securities and investment management company. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification initiatives. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Morgan Stanley has been undertaking several initiatives aimed at increasing reliable revenue sources. Strategic expansion efforts, including the acquisitions of Eaton Vance, E*Trade Financial and Shareworks, are in sync with its efforts to focus less on a capital markets-driven revenue mix.

Last year, in a move that signals their commitment to further collaboration and innovation, Mitsubishi UFJ Financial Group, Inc. and Morgan Stanley announced the launch of “Alliance 2.0”. This will see combined Japanese equity research, sales and execution services for institutional clients at Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley MUFG Securities. Also, their equity underwriting business will be rearranged between the two brokerage units. These efforts will solidify the company’s position in Japan’s market.

A favorable macroeconomic backdrop is expected to support its IB business, further strengthening Morgan Stanley’s financials. The demand for both advisory and underwriting businesses will likely rise as corporates grow comfortable around the current economic backdrop.

With a market cap of $193.6 billion, MS is expected to continue benefiting from its scale and business expansion efforts. Its shares have jumped 30.3% in the past six months. The Zacks Consensus Estimate for 2024 earnings has moved 3.8% upward to $7.29 in the past month.

Price and Consensus: MS

Goldman: This Zacks Rank #2 company is a leading global provider of investment banking, securities, investment management and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers globally.

Like Morgan Stanley, the key to the company’s financial stability is its business restructuring efforts. GS has been refocusing on its core business strengths of IB and trading while scaling back its consumer banking footprint. Though these efforts have resulted in near-term volatility in its earnings, the company expects these to positively impact its financials over time.

Further, robust client engagement, backed by digital disruption and transformation trends, signs of growing M&A and underwriting pipelines and global expansion efforts will keep supporting Goldman’s prospects over time. A solid performance of buoyant equity markets and rate cuts this year, along with Goldman Sachs’ leadership position, lent it an edge over its peers.

Goldman has a market cap of $165.3 billion. Over the past six months, the company’s shares have rallied 22.8%. The Zacks Consensus Estimate for ongoing-year earnings has been revised 4.4% north to $37.15 in the past 30 days.

Price and Consensus: GS

Raymond James: This is a diversified company based in St. Petersburg, FL. The company, along with its subsidiaries, provides financial services mainly in the United States, Canada and the U.K.

RJF, with a Zacks Rank #2, has inked several strategic deals over the past years, which has helped its expansion into Europe and Canada. In fiscal 2023, the company acquired Canada-based Solus Trust Company Limited, while in fiscal 2022, it acquired SumRidge Partners, TriState Capital Holdings and the U.K.-based Charles Stanley Group PLC. These deals, along with several past ones, poise Raymond James well for future growth. Management looks forward to actively growing through acquisitions with an aim to strengthen the Private Client Group and Asset Management segments further.

Though steadily rising expenses make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, Raymond James’ robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.

With a market cap of $30.5 billion, Raymond James is expected to continue benefiting from its scale and business expansion initiatives. Its shares have rallied 21.6% over the past six months. The Zacks Consensus Estimate for fiscal 2024 earnings has been revised 2% upward to $10.39 over the past 30 days.

Price and Consensus: RJF

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