M&A Rebound Fizzles: How to Play Morgan Stanley Stock Now?

The resurgence in mergers and acquisitions (M&As) anticipated by investors following President Donald Trump’s re-election and expectations of favorable regulatory changes are yet to materialize. As such, shares of Morgan Stanley MS, one of the most well-known global investment banks, have tanked 4.2% this year. It has fared worse than its close peers, Goldman Sachs GS and JPMorgan JPM.

Also, in the same time frame, the industry it belongs to has edged down 0.5% and the S&P 500 index has also fallen 4.2%.

MS YTD-Month Price Performance

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Entering 2025, a major rebound in M&As was expected, with deal-making activities likely to grow in the mid-20s. This optimism stemmed from pent-up demand, stabilizing or declining interest rates, tightening credit spreads and strong public market valuations. Further, the Trump administration was regarded to be more business-friendly, with an expected rollback of stringent oversight that could mark the end of the prolonged regulatory scrutiny.

But what has transpired so far this year is quite different. Deal-making activities have paused as ambiguity over the tariff and ensuing trade war has resulted in extreme market volatility. These developments have led to economic uncertainty, data indicating a slowdown in the U.S. economy and mounting inflationary pressure. Hence, amid such a backdrop, companies are rethinking their M&A plans despite stabilizing rates and having significant investible capital.

This will significantly impact investment banking firms such as Morgan Stanley, JPM and GS, which generate billions in revenues from M&A advisory fees.

Year 2024 marked a turnaround for the global investment banking (IB) sector after two years of weak performance. Global M&As rebounded as clarity on macroeconomic matters, the higher likelihood of the soft landing of the U.S. economy and interest rate cuts globally drove deal-making activities. Morgan Stanley saw a 35% jump in its IB fees.

During the fourth-quarter 2024 earnings call in January, CEO Ted Pick expressed strong optimism about sustained momentum, citing a robust M&A pipeline. However, the outlook has since shifted, with the company now anticipating a delay in the IB recovery. As a result, advisory income is expected to take a hit in the near term.

Earlier this week, Bloomberg reported that Morgan Stanley intends to cut roughly 2,000 jobs later this month to improve operational efficiency. The layoffs will take place across the firm, excluding 15,000 financial advisers.

Other Factors to Influence Morgan Stanley

Revenue Diversification: MS has lowered its reliance on capital markets for income generation. The company’s focus on expanding its wealth and asset management operations and the strategic acquisitions, including Eaton Vance, E*Trade Financial and Shareworks, are steps in that direction. These moves have bolstered its diversification efforts, enhanced stability and created a more balanced revenue stream across market cycles. Both businesses’ aggregate contribution to net revenues jumped to more than 55% in 2024 from 26% in 2010.

Last year, Morgan Stanley recorded $82.5 billion in total net flows in the Investment Management division compared with just $7.5 billion in 2023. Hence, assets under management or supervision were $1.6 trillion as of Dec. 31, 2024, rising 14% year over year. The Wealth Management division’s total client assets jumped 21% to $6.2 billion at 2024-end.

Strategic Alliance: Morgan Stanley’s partnership with Mitsubishi UFJ Financial Group, Inc. MUFG is expected to keep supporting profitability. In 2023, the companies announced plans to deepen their 15-year alliance by merging certain operations within their Japanese brokerage joint ventures.

The new strategic alliance 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 has been rearranged between the two brokerage units. These efforts will solidify the company’s position in the lucrative Japanese market.

Fortress Balance Sheet: Morgan Stanley’s solid balance sheet position supports its enhanced capital distributions. Following the 2024 stress test results, the company announced an increase in its quarterly dividend by 8.8% to 92.5 cents per share.

The company also reauthorized a new multi-year share repurchase program of up to $20 billion, effective the third quarter of 2024 and with no expiration date. As of Dec. 31, 2024, approximately $18.5 billion worth of shares remained available under the authorization.

Analyst Sentiments Turn Bearish for Morgan Stanley

Given the expectations of weakness in the IB business, analysts are turning bearish on Morgan Stanley’s prospects. Over the past month, the Zacks Consensus Estimate for 2025 and 2026 earnings has been revised lower.

Estimate Revision Trend

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Nonetheless, over the long term, the company’s earnings are expected to grow at 13.3%. The Zacks Consensus Estimate for Morgan Stanley’s 2025 and 2026 earnings implies year-over-year growth of 6.7% and 10%, respectively.

Earnings Estimates

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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Morgan Stanley’s Premium Valuation

The MS stock is currently trading at the forward 12-month price/earnings (P/E) of 13.89X. This is above the industry’s 12.71X, reflecting a slightly stretched valuation.

Price-to-Earnings F12M

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End Note on Morgan Stanley

Morgan Stanley’s strong global presence and strategic focus on stable revenue streams provide a solid foundation for organic growth. Its balanced business model ensures resilience and growth potential, even in volatile market conditions.

However, the likelihood of a significant investment banking rebound this year remains low, making the MS stock a cautious bet. Additionally, the stock’s premium valuation and prevailing bearish analyst sentiment warrant careful consideration before investing.

Current shareholders may benefit from holding for strong long-term returns, while potential investors should wait for greater macroeconomic clarity before entering a position.

Morgan Stanley currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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