Morgan Stanley

Morgan Stanley reported second-quarter earnings results that did not disappoint, with revenue of $21.3 billion growing a striking 27% from the year-ago period, while $3.46 in diluted EPS swelled 58%. Like its peers, the firm saw surreal growth in investment banking (up 58%) and trading (up 48%).

Why it matters: The key story from earnings is outstanding investment banking and trading results, and there's plenty of debate over their durability, with banks making money hand over fist amid client demands for liquidity and near-constant portfolio repositioning. Still, we see little in the near term that would point to a significant decline in activity — even a meltdown in the AI trade would drive at least a short-term surge in trading volume and profits, for example. To contextualize the magnitude of trading performance, we now expect 42% growth in equity trading revenue for 2026, up from the 6% projected growth at our last update. These are truly absurd results that banks' trading desks are producing. We still view trading revenue growth in the mid-single-digit annualized range as the appropriate long-term number, which points toward a massive moderation at some point during the 2027-35 period.

The bottom line: As we digest second-quarter earnings, we've raised our fair value estimate for wide-moat Morgan Stanley to $184 from $165. The lion's share of this change is tied to our revised projection for nearly 28% growth in the trading business—and 640 basis points of margin expansion—in 2026, up from 6% and 320 basis points, previously. A subsidiary driver was stronger than anticipated asset growth in the firm's wealth management business, which quietly produced 8% annualized growth in net new assets during a seasonally quieter quarter on the back of robust IPO market performance, validating the integrated firm strategy and highlighting the importance of the bank's workplace business.

We see two main ways in which our thesis could be wrong about Morgan Stanley. On the bullish side of the ledger, the Wall Street banks are increasingly trading in line with the AI trade due to unprecedented demand for financing—both in equity and debt markets—that could drive a durable, medium-term tailwind for investment banks. Few boutique banks boast the global reach, distribution capabilities, and depth of institutional relationships that marquee investment banks like JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup do, so it would be no surprise to see them take an increasing share of the incremental financing revenue tied to a generational AI infrastructure buildout if momentum continues to accelerate. CEO Ted Pick estimated that we'd be about 10%-15% into a $10 trillion AI infrastructure build on the analyst call, and as hyperscalers shift from funding growth with cash flow toward capital markets, this could provide an investment banking fee tailwind that we underappreciate, making our $184 revised valuation look quite conservative—particularly with our wide-moat Nvidia analyst calling for annual expenditures on AI infrastructure exceeding $3 trillion annually, globally, by 2030.

On the other hand, our forecasts could prove quite aggressive if the AI trade started to unwind, either due to concerns regarding the ethereal sums being spent on an infrastructure buildout that could result in slim return on investment if model routing and the proliferation of XPU chips drive utilization costs down sufficiently (this seems increasingly likely) or if the tools struggle to drive the anticipated benefits to corporations and enterprises which adopt them, curtailing adoption and enterprise spending appetite. The latter looks less likely to us at this stage, although the market is evolving very quickly. In the latter case, a quick decline in capital raising would immediately impact investment banking results, while declining equity market valuations would have negative impacts on the prime brokerage business as clients took in leverage, on the trading businesses, which generate some chunk of revenue as a proportion of notional value, and on the wealth management business, with potentially significant declines in client assets and asset-based fees.

With this significant range of potential outcomes, we're reasonably comfortable with our $184 valuation and forecasts that sit somewhere in the middle, leaving shares trading at about a 20%-25% premium at July 15 intraday prices. With the market tending to extrapolate outstanding results in the cyclical and mean-reverting investment banking and trading industries too far into the future, this is where we would expect to land at this stage in the cycle, and we'd encourage investors to await a more attractive entry point for this high-quality name.

We've raised our fair value estimate for Morgan Stanley to $184 per share from $165 per share after digesting second-quarter 2026 earnings results. More specifically, outstanding results in institutional trading have led us to raise our forecast for trading revenue growth to 28% from 6% for the full year, with an even more pronounced impact on operating income (we now pencil in 640 projected basis points of ROE expansion, from 320 basis points) given the significant operating leverage in that business. The results posted by the trading banks have been genuinely unbelievable in the first half of 2026, driven by client demand for liquidity and ongoing portfolio repositioning. Prime brokerage demand has also been a significant driver, particularly out of Asia. From a valuation perspective, there's real debate as to how long this tailwind can realistically last, but we see few impediments over the near-term to trading revenue growth, with a few mega-IPO deals waiting in the wings and with the recognition that even an unwinding of the AI trade would drive robust trading segment results in the short-term (higher volatility, portfolio repositioning). Through the cycle, we continue to view mid-single-digit annual growth in trading income as the right number, implying significant moderation at some point during the 2027-35 period. Our revised valuation corresponds to a 2026 price/earnings multiple of 14.3 times and a 2026 price/tangible book value multiple of 3.9 times.

Overall, we're reasonably constructive regarding Morgan Stanley's five-year outlook, with our forecasts contemplating a 6.6% compound annual growth rate in post-provision net revenue between 2026-30. Most of that is driven by the wealth business, where we expect the firm to grow its client asset base at a 9.8% compound annual growth rate between 2026-30, split about 50%/50% between organic net new asset growth and market appreciation. While we're constructive regarding the potential for technology investments to drive lower compensation ratios at the big banks, our concerns regarding peak cycle earnings in the trading business lead us to forecast slight efficiency ratio degradation between 2026-30, with our forecast calling for an efficiency ratio of 70.4% in that year, still broadly in line with company targets for a 70% or better operating efficiency ratio over the long term but 160 basis points worse than the firm generated in 2025. Taken together, this drives a midterm compound annual growth rate of 5.5% in operating profit over that period.

The key valuation drivers for the firm are growth in net new assets, market appreciation in the wealth and investment management businesses, firmwide efficiency ratio, and projected leverage. Long-term revenue growth in trading and investment banking is also important, but those lines are subject to wild annual swings. We project a through-the-cycle annual geometric growth rate of 1.8% in investment banking and 3.1% in institutional trading and financing over the next half-decade.

While the US financial services industry is intensely competitive, we believe that Morgan Stanley has carved out a wide economic moat rating. More specifically, we believe that the firm benefits from substantial switching costs in its high-net-worth wealth management franchise and from intangible assets in its global investment banking operations, which should allow it to generate excess returns over the next 20 years.

Morgan Stanley has evolved significantly since the nadir of the global financial crisis, reincorporating as a bank holding company, diversifying its funding base, derisking its trading operations, and most importantly, expanding its stable, fee-generating revenue base to roughly 55% of sales over the past three years. While the transition took the better part of a decade and required the deft integration of a handful of acquisitions—Smith Barney, E-Trade, and most recently Eaton Vance—we believe that Morgan Stanley has emerged significantly stronger than its pre-global-financial-crisis vintage, and should generate midteens returns on equity through the cycle, comfortably north of our 9.5% cost of equity estimate for the name. To this effect, our forecasts contemplate average returns on equity of 16.9% over the decade to come, ahead of the 12.6% average over the past five years as the firm benefits from a durable mix-shift toward its higher-return wealth management business, and from favorable changes like a mix shift toward investment banking (relative to 2022-24) and fixed cost leverage in its global banking and markets business.

In this report, we’ll briefly outline our economic moat thesis for each of the firm's three core operating segments, and tie our thoughts together with a consideration of the appropriate moat duration for the firm.

Considering the firm’s segments in sequence, we believe that Morgan Stanley’s wealth management business warrants a wide economic moat rating, qualitatively justified by switching costs on both the financial advisor and high-net-worth client sides of the ledger. This view is supported by the firm’s generally affluent clientele, strong client retention ratios, and Morgan Stanley’s status as a premier asset gatherer in an attractive wealth management vertical, features which together underpin durable, mid- to high-20% segment returns on equity now that the firm has achieved requisite scale and integrated its E*Trade acquisition. Briefly outlining switching costs, financial advisors tend to be reluctant to leave their firm for two key reasons: retraining on a new set of systems and products, requiring significant time investment, and the involuntary loss of just shy of 20% of client assets, on average, during the transition (Cerulli). On the other side of the ledger, high-net-worth clients are reluctant to shuffle around between wealth management providers, particularly at higher income strata, due to lost product access and the need to absorb costly tax hits when unwinding structured products, alternative asset or proprietary fund holdings, and any securities that aren’t available with a new custodian (where relevant). Similar to software companies, we believe that client stickiness increases in the volume and complexity of products that clients utilize with their wealth manager, so a high-net-worth individual that uses financial planning, tax and estate planning, proprietary alternative investments, private bank loans, tax loss harvesting overlays, or structured notes is much less likely to leave their provider than a retail investor with $250,000 in assets that invests predominately in liquid funds, ETFs, or equity securities that are universally available. This is why we view high-net-worth wealth managers like Julius Baer as warranting wide economic moats, while assets under robo-advisory arrangements or with lower average client assets—like Edward Jones’ $240,000-$250,000—look generally less sticky. With 99% reported retention among clients with more than $1 million in assets, and with an average of $1.2 million in assets per client, by our math, we believe that Morgan Stanley’s wealth management arm skews toward a wide, rather than a narrow moat. As we see it, Morgan Stanley offers a sufficiently robust assortment of services, from financial and estate planning to tax loss harvesting through Parametric Portfolios, direct indexing through Calvert Funds, and alternative asset access, to distinguish it from lower-touch wealth management providers in the mass channel, like privately held Edward Jones or wide-moat LPL Financial in the eyes of advisors and clients.

There is a certain elegance to the competitive landscape in wealth management, where firms compete for advisors by offering access to intellectual capital, technology platforms, and product breadth. These resources enable financial advisors to target higher-value clientele and increase their productivity. In turn, advisors cede a greater share of their gross income to wirehouse firms that provide those services, assuming that the higher advisor productivity enabled by these firms, measured by client assets per advisor, outstrips the lower advisor payout ratios they receive. Our math suggests that this is generally true. At industry average productivity levels, an advisor would earn the same amount of money working for a wirehouse firm with a 40% payout ratio as an independent RIA would with a 90% payout. In practice, this means that more productive advisors are drawn to wirehouse firms, which provide them with the complex services they need to service high-net-worth clients, increasing their earnings power, while more affluent clients gravitate toward firms with the breadth of products and caliber of advisers needed to service their more complex financial needs. We suspect that the modest net migration we have seen toward the hybrid RIA and RIA channels over the past few decades is driven largely by clients that have smaller asset bases or less complex needs, who can be adequately serviced (and more profitably serviced, from the adviser’s perspective) by the likes of smaller wealth management firms. While there is nothing that explicitly prohibits companies like Morgan Stanley and Bank of America from competing more aggressively for less affluent customers, we believe that the lower incremental returns, higher churn rates, and risk of cannibalizing the core franchise—as doing so would likely necessitate developing a lower-touch, higher payout wealth management channel—don’t justify the incremental benefit of doing so. This is particularly true when net flows are positive and returns in the core franchise remain strong, as is currently the case.

Our final point in favor of a wide moat designation for the wealth franchise is Morgan Stanley’s position as a premier organic asset gatherer. While the firm’s $9.3 trillion in client assets across its wealth management, self-directed brokerage, and investment management arms at year-end 2025 are indicative of past success, placing the firm ahead of wirehouse competitors like Bank of America ($4.8 trillion), JPMorgan Chase ($7.1 trillion), and Wells Fargo ($2.5 trillion), strong organic inflows are an important leading indicator of future performance. Over the past decade, the firm has generated strong organic net inflows of 6%-7% annually, comfortably ahead of Bank of America’s 1%-2% annual growth and Wells Fargo’s 1% annual decline.

Pivoting to investment banking and institutional trading, we believe that Morgan Stanley has carved out a durable competitive edge around its brand and global distributional capabilities, particularly in equity underwriting, which looks poised for a rebound after a significant lull during 2022–24. The firm is also quite competitive in mergers and acquisitions advisory, the most attractive investment banking niche, finishing second in Dealogic league table rankings in equity capital markets markets behind JPMorgan Chase and third in M&A advisory behind JPMorgan Chase and Goldman Sachs in 2025. Our view is corroborated by 14% average segment returns on equity over the past half-decade, and by forecast 17%-18% returns over the decade to come—weighed down by sluggish projected trading revenue growth but more than offset by a mix-shift toward higher-return investment banking and financing.

In investment banking, firms compete based on reputation, prior performance, brand, league table rankings, research coverage, and distributional capabilities. This underpins a self-reinforcing cycle in which the largest global banks with global distribution capabilities consistently win the largest, most lucrative deal flow, in turn attracting the most productive investment bankers who bolster those firms’ execution capabilities and reputations. While boutique peers can compete ably in the middle market or for single-market deals—an Australian firm raising capital in Australia may not care loads if the bank leading its syndicate has boots on the ground in Manhattan—global reach and balance sheet capacity are prerequisites for competing for the most lucrative deal flow that seeks access to global capital. This is best evidenced by most European issuers usually requiring the participation of a US investment bank to access US capital pools, a dynamic that favors JPMorgan Chase, Goldman Sachs, Morgan Stanley, and to a lesser extent, Bank of America and Citigroup, relative to smaller peers. It’s no coincidence, in our view, that the five largest global investment banks also boast the largest institutional trading desks by revenue, as the ability to attract marquee institutional investors is a core part of those firms’ value propositions—and clients are willing to pay for this, with bulge bracket investment banks earning a 13% premium, adjusted for transaction size, relative to second tier competitors (Golubov et al, Journal of Finance). By our math, Morgan Stanley maintained average investment banking market share of 7.1% over the past five years, with pronounced strength in equity underwriting. We expect this to strengthen to 7.5% over the five years to come, driven by a recovery in equity capital markets revenue, and view the firm as one of the long-term winners in the space as companies tap public markets later and at larger valuations—a dynamic that squeezes middle-market banks like no-moat Jefferies.

Finally, we believe that a no-moat rating is appropriate in Morgan Stanley's investment management segment, which also carries the largest risk (if still small) of material value destruction given its exposure to riskier private equity, private credit, real estate, and infrastructure through its alternative asset management portfolio. This view is embodied by the segment’s return profile, with our projections calling for average segment returns on equity of just 13.3% over the next decade, only incrementally ahead of our assigned 9.6% cost of capital for the firm. Given its relative immateriality to consolidated results, we’ll largely limit our discussion to the ecosystem benefits of investment management: the firm’s alternative asset portfolio and Parametric portfolio tax loss harvesting strategies (acquired in 2021 with the Eaton Vance purchase) and investment overlays are a unique, differentiating factor that caters to high-net-worth wealth management clients and serves to increase switching costs in that critical business. Net flows have been above average, with relative strength in fixed income and alternative assets outweighing weak performance in active equity, which is secularly pressured. Positive long-term flows are probably more reflective of the firm’s captive distribution through wealth management rather than attributable to performance or a brand intangible asset, with very average Morningstar fund ratings for the subset of AUM that the ratings agency covers.

Tying our thoughts together, we believe that Morgan Stanley warrants a wide economic moat, built upon durable switching costs in its wealth management segment and intangible assets in its investment banking and trading operations. In our view, the long client lives implied by 99% retention among an attractive, high-net-worth clientele, consistently strong organic inflows, and outsize advisor productivity suggest that a wide, rather than a narrow moat is appropriate for the segment. In investment banking and trading, we view Morgan Stanley as one of only a handful of global investment banks capable of competitively underwriting and distributing the largest global deals, in an industry expected to grow increasingly top-heavy over time. Finally, we believe that the combination of revenue diversification, cultural and regulatory changes that limit participation in riskier trading categories, and significantly lower leverage leaves us comfortable with a wide moat rating, as we view the risk of material value destruction as low.

The largest financial services firms could capture substantial market share on the back of technology investments in areas like underwriting, pricing, due diligence, and customer service.

An AI investment cycle could prove larger and last longer than we expect, resulting in a significant, durable increase in financing demands and investment banking revenue growth.

A changing regulatory climate could provide significant upside for banks, driving some combination of higher M&A activity, capital returns to shareholders, or reinvestment in growth.

Equity underwriting volumes could remain perpetually lower, given the high costs of being a public company, disproportionately impacting equity underwriting leaders like Morgan Stanley.

Protectionist trade policy could result in slower global growth and capital markets activity, to the detriment of large global trading and investment banks.

Many banks have tried to increase cross-selling and organization across business units, but few have succeeded. Failure of the integrated firm strategy could render long-term financial targets out of reach.