Analysts see ‘unattractive’ risk reward for Goldman Sachs, Morgan Stanley

Goldman Sachs Group Inc. and Morgan Stanley shares are offering an “unattractive risk reward profile” in the wake of the recent rally in bank stocks, HSBC analysts said, adding that investors should be wary of arguments that an investment banking “supercycle” will drive shares much higher.

The analysts led by Saul Martinez said that while investment banking fees likely will increase, their estimates for Goldman Sachs and Morgan Stanley already factor in around a 30% increase from 2024 levels. “We think market expectations are much higher than they have been, leaving room for disappointment,” Martinez said in a note, downgrading both banks to hold from outperform.

Donald Trump’s victory in the U.S. presidential election saw bank stocks surge as investors expect his policies, including tax cuts and lighter regulation, to drive economic growth and boost bank stocks. Morgan Stanley and Goldman Sachs shares are both up 13% and 14% respectively since Nov. 6, when the KBW Bank Index surged almost 10% on the day after the election.

While some analysts are bullish – including Wells Fargo & Co.’s Mike Mayo, who called the catalyst a “watershed moment” and sees chances for a “super cycle” in capital markets – Martinez is hardly alone in his hesitancy. Oppenheimer analysts recently downgraded JPMorgan Chase & Co. to perform from outperform following the rally, warning that the bank guided to lower net interest income.

The KBW Bank Index, which tracks the top 34 U.S. banks, including names like Citigroup Inc., JPMorgan, Goldman Sachs and Morgan Stanley, is on track for its best year since 1997. Having maintained its gains following the election, the index is expected to set another record high soon.

Despite the downgrades, Martinez said he is even more positive today on fundamental outlooks than before. He raised his earnings per share estimates for both banks to incorporate higher investment banking and asset and wealth management fees and “much higher buybacks.”

Goldman Sachs and Morgan Stanley shares dipped 1.3% and 2.8% respectively at the opening bell on Tuesday.