Given the revival in corporate debt and equity issuances and deal-making activities, the Zacks Investment Bank industry is expected to witness a turnaround in investment banking fees in the quarters ahead. Clarity on several macroeconomic factors will also keep up the momentum.

Heightened client activity and increased trading volume will support the trading business. While costs related to technological upgrades might impede the bottom line, industry players will witness improved operating efficiency over time. Hence, investment banks like Morgan Stanley (MS Quick QuoteMS - Free Report) , The Goldman Sachs Group, Inc. (GS Quick QuoteGS - Free Report) , Robinhood Markets, Inc. (HOOD Quick QuoteHOOD - Free Report) and Raymond James Financial, Inc. (RJF Quick QuoteRJF - Free Report) are worth considering.

Industry Description

The Zacks Investment Bank industry consists of firms that provide financial products and services, including advisory-based financial transactions to corporations, governments and financial institutions worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually, the companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (M&As, advisory services and securities underwriting), asset management and trading and principal investments (proprietary and brokerage trading).

3 Major Themes to Drive the Investment Bank Industry

Resurgence in Underwriting and Advisory Businesses: After a prolonged weakness in underwriting, IPOs and deal-making activities since 2022 due to geopolitical tensions and global macroeconomic concerns, advisory and underwriting businesses have revived, with the pipeline looking healthy. The macroeconomic environment is steadying, driven by the global interest rate-cutting cycle and growing optimism for a strong U.S. economy. As such, underwriting and M&A activities are on a path to a sustained recovery in the coming days. Further, the incoming Trump administration is expected to adopt a more lenient approach to deal-making, signaling the end of an era marked by prolonged regulatory scrutiny. While lingering geopolitical issues remain, the improving operating backdrop will support the industry players’ top-line growth.

Trading Business to Remain Solid: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since 2022, market volatility has significantly increased due to several geopolitical and macroeconomic headwinds. Though there has been some stability in the macroeconomic backdrop of late as inflation is cooling down, markets continue to grapple with relatively higher interest rates and other geopolitical matters. Also, the Trump administration’s plan to impose tariffs will likely lead to increased market volatility. So, the trading desks are expected to keep witnessing a flurry of activity in the near term. So, investment banks are expected to report solid trading income in the upcoming period.

Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising will likely support the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to help clients with infrastructure development and new platforms. While the industry players are likely to face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Investment Bank industry is a 20-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #12, which places it in the top 5% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a robust earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 7.3% upward.

Before we present a couple of stocks that you may want to invest in, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While stocks in the industry have collectively surged 44.3%, the S&P 500 composite has rallied 23.6% and the Zacks Finance sector has risen 21.1%.

One-Year Price Performance

 

Industry Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing investment banks because of significant variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 2.66X, above the median level of 2.08X, over the past five years. The industry is trading at a considerable discount compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 14.35X and the median level is 13.95X.

Price-to-Tangible Book Ratio (TTM)

Finance stocks typically have a lower P/TBV ratio, so comparing investment banks with the S&P 500 may not make sense to many investors. However, comparing the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 5.27X and the median level of 4.53X for the same period are above the Zacks Investment Bank industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)

 

4 Investment Banks to Bet on

Morgan Stanley: This Zacks Rank #2 (Buy) stock operates globally as an investment banking, securities and investment management company. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification initiatives. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Morgan Stanley has been undertaking several initiatives aimed at increasing reliable revenue sources. Strategic expansion efforts, including the acquisitions of Eaton Vance, E*Trade Financial and Shareworks, are in sync with its efforts to focus less on a capital markets-driven revenue mix. 

In 2023, in a move that signals their commitment to further collaboration and innovation, Mitsubishi UFJ Financial Group, Inc. and Morgan Stanley announced the launch of "Alliance 2.0." This 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 will be rearranged between the two brokerage units. These efforts will solidify the company’s position in Japan’s market.

A favorable macroeconomic backdrop is expected to support its IB business, further strengthening Morgan Stanley’s financials. The demand for both advisory and underwriting businesses will likely rise as corporates grow comfortable with the current economic backdrop.

With a market cap of $199.8 billion, MS is expected to continue benefiting from its scale and business diversification efforts. Its shares have rallied 17.3% in the past six months. The Zacks Consensus Estimate for 2025 earnings has moved 1.3% upward to $8.01 in the past week.

Price and Consensus: MS

Goldman: This Zacks Rank #2 company is a leading global provider of investment banking, securities, investment management and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers globally.

Like Morgan Stanley, the key to the company’s financial stability is its business restructuring efforts. GS has been refocusing on its core business strengths of IB and trading while scaling back its consumer banking footprint. Though these efforts have resulted in near-term volatility in its earnings, the company expects these to positively impact its financials over time. 

Further, robust client engagement, backed by digital disruption and transformation trends, signs of growing M&A and underwriting pipelines and global expansion efforts will support Goldman’s prospects over time. A solid performance of buoyant equity markets and rate cuts this year, along with Goldman Sachs' leadership position, lent it an edge over its peers.

Goldman has a market cap of $176.7 billion. Over the past six months, the company’s shares have gained 13.7%. The Zacks Consensus Estimate for ongoing-year earnings has been revised almost 1% north to $43.39 in the past seven days.

Price and Consensus: GS

Robinhood: HOOD, sporting a Zacks Rank #1, is a financial services company that offers trading services in crypto, stocks, options and ETFs, cash management, margin and securities lending and Robinhood Gold. The company aims to democratize finance through its commission-free trading model with no account minimums.

With the Federal Reserve lowering interest rates, Robinhood’s transaction-based revenues are expected to improve as investors seek higher returns through capital markets and alternative investments. The company’s efforts to become a leader in the active trader market alongside increased retail participation and secular tailwinds, such as a higher U.S. mobile banking population, will likely drive the company’s top-line growth.

HOOD continues to diversify its product base to acquire new clients and gain market share. This will expand the company’s client base, enabling greater operating leverage and paving the way for sustained profitability. The company has been engaged in opportunistic expansions to deepen its footprint within the United States and globally. Strategic expansion buyouts will continue to aid the company’s growth and establish its international presence.

With a market cap of $35 billion, Robinhood is expected to continue benefiting from its business expansion efforts. Its shares have soared 69.6% over the past six months. The Zacks Consensus Estimate for 2025 earnings has been revised 10.1% upward to $1.09 over the past seven days.

Price and Consensus: HOOD

Raymond James: This is a diversified company based in St. Petersburg, FL. The company, along with its subsidiaries, provides financial services mainly in the United States, Canada and the U.K. 

RJF, with a Zacks Rank #2, has inked several strategic deals over the past years, which has helped its expansion into Europe and Canada. In fiscal 2023, the company acquired Canada-based Solus Trust Company Limited, while in fiscal 2022, it acquired SumRidge Partners, TriState Capital Holdings and the U.K.-based Charles Stanley Group PLC. These deals, along with several past ones, poise Raymond James well for future growth. Management looks forward to actively growing through acquisitions to strengthen the Private Client Group and Asset Management segments further.

Further, Raymond James will likely witness a solid improvement in IB fees going forward, driven by a healthy pipeline and active M&A market. Though steadily rising expenses are worrisome, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. 

With a market cap of $31.5 billion, Raymond James is expected to continue benefiting from its scale and business expansion initiatives. Its shares have surged 38.1% over the past six months. The Zacks Consensus Estimate for fiscal 2025 earnings has been revised marginally upward to $10.99 over the past seven days.

Price and Consensus: RJF