Morgan Stanley has been a premium stock among its peers in recent years, with shareholders benefiting from its combination of investment banking and wealth management. However, the stock’s outperformance could be coming to an end, according to Goldman Sachs analysts.
Morgan Stanley shares were down 2.1% at $94.56 in morning trading Wednesday after a Goldman Sachs team led by analyst Richard Ramsden downgraded the stock to Neutral from Buy. That leaves them a little more than 10% below the record high they hit this summer.
Ramsden lowered his 12-month price target on Morgan Stanley stock to $105 from $122.
“MS has a best-in-class investment bank, which has taken notable share over the past decade, and a leading wealth management platform, both of which have contributed to strong return improvement,” Ramsden wrote in a research note. “However, as we move further into the investment banking cycle, we see other names as more likely to benefit.”
The key point is Morgan Stanley’s business is less skewed toward capital markets, such as debt and equity underwriting, than rivals, meaning it will get proportionately less of a benefit from an expected rebound in activity.
Ramsden estimates that independent investment banks’ capital markets revenue will grow at a compound annual rate of 12% from 2024 through 2026, compared with a 3% rate for Morgan Stanley.
Meanwhile, in the wealth management arm of Morgan Stanley’s business — which makes up around half of its revenue — the company could be hit by pressure to raise the interest it pays on investors’ uninvested cash. Morgan Stanley said in July it would raise rates on some customers’ uninvested cash in advisory accounts.
The move comes amid legal action against some banks over the use of cash-sweep accounts, which pay low interest rates on uninvested cash and have allowed banks to boost their net interest income.
“MS continues to see low-yielding sweep deposit outflows, as clients continue to seek higher-yielding options for cash balances and our view is that this trend continues until after the first few [interest-rate] cuts,” Ramsden wrote.
The analyst estimated Morgan Stanley’s net interest income is likely to fall 13% this year from 2023, with a further 2% decline from this year’s level in 2025.
“MS…has less growth potential, and trades at a higher multiple than large peers,” Ramsden wrote.