Goldman vs. Morgan Stanley: Which Investment Bank Has More Upside?

Goldman Sachs GS and Morgan Stanley MS are often the first names that come to mind when discussing leading firms in the investment banking (IB) sector. Both companies have been in the spotlight following President Donald Trump’s re-election amid expectations of favorable regulatory changes.However, global deal-making activities have slowed down as ambiguity over tariffs and the ensuing trade war resulted in extreme market volatility. Given such a backdrop, a closer examination of Morgan Stanley and Goldman's fundamentals, growth prospects and challenges will help determine which is the better investment today.Goldman & Morgan Stanley’s Unique Business ModelsGoldman is sharpening its focus on its core strengths in IB and trading while scaling back its consumer banking footprint. The strategic pivot aligns with the company’s efforts to concentrate on areas where it has consistently demonstrated strong performance. By leveraging its leadership position, extensive operational scale and exceptional talent, the company aims to strengthen its core businesses and drive growth in areas where it has a competitive edge.In contrast, Morgan Stanley 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, such as 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 surged to more than 55% in 2024 from 26% in 2010. The years 2022 and 2023 were tough for Goldman and Morgan Stanley as deal-making activities came to a grinding halt. Hence, both witnessed a decline in earnings due to lower revenues, which were hurt by weak IB performance. Nonetheless, a substantial improvement in the industry-wide deal value and volume in 2024 drove global mergers and acquisitions (M&As). As such, GS and MS witnessed top and bottom-line improvements.In 2024, Goldman’s earnings jumped a whopping 77% on revenue growth of 16% (the majority of this derived from the IB business). The company’s rank #1 in announced and completed M&As was the primary driving force behind this solid performance. Goldman’s Global Banking & Markets Division Image Source: The Goldman Sachs Group, Inc.Likewise, Morgan Stanley posted a 54% increase in earnings last year, with revenues rising 14%. The company’s wealth and investment management operations equally supported its performance together with arobust IB business.Morgan Stanley’s Revenue Trends Image Source: Morgan StanleyEntering 2025, a solid rebound in M&As was expected, with industry-wide deal-making activities likely to rise in the mid-20s. The optimism stemmed from pent-up demand, stabilizing or declining interest rates, tightening credit spreads and strong public market valuations. Moreover, 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. Uncertainty over the tariff and ensuing trade war has resulted in extreme market volatility and economic ambiguity (data indicating a slowdown in the U.S. economy and mounting inflationary pressure). So, in such an environment, companies are rethinking their M&A plans despite stabilizing rates and having significant investible capital.Thus, IB firms such as Morgan Stanley and Goldman, which generate billions in revenues from M&A advisory fees and underwriting business, are expected to be hit hard in the near term.Goldman & Morgan Stanley’s Impressive Capital DistributionsGS and MS are part of globally systematically important financial institutions (G-SIFI). Hence, they are subject to annual stress tests held by the Federal Reserve to get clearance for capital distributions. After clearing this year’s stress test, both companies raised quarterly dividends. Goldman increased its dividend by 9.1% to $3 per share. In the past five years, it hiked dividends four times, with an annualized growth rate of 24.5%. Similarly, MS hiked its quarterly dividend by 8.8% to 92.5 cents per share. It has also raised dividends four times in the past five years, with an annualized growth rate of 26.9%. At present, MS has a dividend yield of 3.43%, which is higher than the industry average of 2.37% and Goldman’s yield of 2.35%. Dividend Yield Image Source: Zacks Investment ResearchGS also has a share repurchase plan in place. In February 2023, it announced a share repurchase program, authorizing the buyback of up to $30 billion worth of shares. As of Dec. 31, 2024, the company had $10 billion worth of shares remaining under authorization. On the other hand, Morgan Stanley reauthorized a new multi-year share repurchase program of up to $20 billion in July 2024, with no expiration date. As of Dec. 31, 2024, approximately $18.5 billion worth of shares remained available under the authorization.Goldman & Morgan Stanley’s HurdlesGoldman and Morgan Stanley face challenges that are expected to hinder their near-term growth prospects, with the most vital factor being the subdued IB business. Other headwinds include rising operating costs and regulatory changes that could create uncertainties for both companies. Goldman’s operating expenses witnessed a five-year (2019-2024) compound annual growth rate (CAGR) of 3.1%. Similarly, Morgan Stanley’s total expenses recorded a CAGR of 7.8% in the same time frame. Both companies’ ongoing investments in technology and market development for business expansion are expected to keep costs elevated.Additionally, being geographically diversified and highly dependent on overseas revenues, risks stemming from the regulatory and political environment, foreign exchange fluctuations and the performance of regional economies may hurt companies’ top line.GS & MS Stock Performance & ValuationIn the past six months, Goldman shares have gained 3.3%, outpacing Morgan Stanley’s 0.2% rise. In comparison, the Zacks Investment Bank industry is up 4.9%, while the S&P 500 Index is down 5% in the same time frame. Six Month Stock Performance Image Source: Zacks Investment ResearchIn terms of valuation, Goldman holds a notable advantage over Morgan Stanley, with a significant gap between the two. Goldman’s trailing 12-month price-to-tangible book (P/TBV) ratio is 1.54, making its shares more attractive to Morgan Stanley’s 2.39. Price-to-Tangible Book Ratio (TTM) Image Source: Zacks Investment ResearchFurther, GS stock is trading at a discount compared with the industry’s trailing 12-month P/TBV ratio of 2.69. This makes the stock more promising for value investors.Goldman & Morgan Stanley’s ProspectsThe Zacks Consensus Estimate for Goldman’s 2025 sales and EPS implies a year-over-year increase of 6.9% and 14.9%, respectively. The EPS estimates for 2025 and 2026 have moved lower to $46.40 and $51.34, respectively, over the past 60 days.GS Earnings Estimate Trend Image Source: Zacks Investment ResearchThe Zacks Consensus Estimate for Morgan Stanley’s 2025 sales and EPS implies a year-over-year rise of 6% and 7.9%, respectively. EPS estimates for 2025 have been trending northward, while for 2026, it has been revised marginally lower, over the past 60 days to $8.58 and $9.29.MS Earnings Estimate Trend Image Source: Zacks Investment ResearchFind the latest earnings estimates and surprises on Zacks Earnings Calendar.Parting Thoughts on GS & MS Investable AnalysisBoth GS & MS have a Zacks Rank #3 (Hold), which makes the task of choosing one stock difficult. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Goldman and Morgan Stanley, two major players in the IB industry, have their strengths. GS leads in stock performance and has better valuation metrics, while MS stands out with its stronger dividend yield. Further, both companies expect their sales and profits to improve in 2025 and 2026.However, increasing expenses and regulatory challenges could adversely impact their market positions and financial health. Further, in the near term, both companies face headwinds because of an uncertain macroeconomic backdrop, which will hurt the IB business. Now, considering the business model, Goldman thrives during periods of robust deal-making and market activity, which is now less likely to occur in 2025. In contrast, Morgan Stanley has a balanced approach, which provides stability and growth potential, even during volatile market conditions. Hence, while both companies maintain strong long-term growth potential, the current scenario warrants a cautious stance for Goldman. On the other hand, Morgan Stanley has a higher chance of navigating the challenging environment.7 Best Stocks for the Next 30 DaysJust released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."Since 1988, the full list has beaten the market more than 2X over with an average gain of +23.9% per year. So be sure to give these hand picked 7 your immediate attention. See them now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report Morgan Stanley (MS): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks