Our Plan for Big Bank Shares Hinges on 2 Things

Following Tuesday’s results from JPMorgan Chase (JPM) and Goldman Sachs (GS), Wednesday morning brought the second leg of our big bank tour with Morgan Stanley (MS) and Bank of America (BAC).

Much like on Tuesday, equities were the standout in trading and fixed income was the soft spot. As we noted in our bank comments yesterday, that mix works in Morgan Stanley’s favor and against Bank of America, and that is exactly how it played out. Both firms described a brisk July and August driven by the AI build-out, followed by a post-Labor Day slowdown as Middle East tensions flared, and interest rates moved sharply higher.

Let’s get more granular, connect some dots and then discuss our plans for these two positions.

Morgan Stanley

Morgan Stanley delivered revenue of $20.3 billion, EPS of $3.03, up from $2.80 in the year-ago quarter and the $2.92 market consensus. The firm’s return on tangible common equity was 22.6%, its fifth consecutive quarter above 20%. Total client assets across wealth and investment management grew by nearly $400 billion during the quarter to a record $10.5 trillion.

Investment banking revenue rose 2% year over year to $2.2 billion, with strength in the Americas and Asia. Advisory revenue of $887 million led the way, while fixed income underwriting remained strong at $747 million. Equity underwriting was the laggard at $525 million, down from broad-based strength a year ago as a few large deals drove the market. CEO Ted Pick described banking pipelines as high, with boardroom dialogs “active and generally receptive to action.” On AI, Pick pegged hyperscaler capex at roughly $1 trillion a year, or 50 to 70 basis points of U.S. real GDP and sees it remaining a very important part of capital markets activity “for years.”

Morgan’s Institutional Securities revenue rose 18% to $10 billion. Equities revenue jumped 41% to $5.8 billion, led by prime brokerage financing on higher client balances, with derivatives and cash also higher. Fixed income revenue was $2 billion on lower structured activity, weaker securitized products and a tough comparison in commodities, partly offset by foreign exchange. Pick argued the equities business is more robust than it was seven or eight years ago thanks to the build-out of Morgan’s derivatives franchise, but acknowledged it remains subject to cycles, pointing to volumes drying up in Asia in September. With 300 basis points of excess CET1 capital, Morgan Stanley has ample room to put more capital to work for clients, and it repurchased $1.5 billion of its shares in the quarter.

The star of Morgan’s quarter was its Wealth business. Revenue rose to a record $9.1 billion with record pretax profit of $2.8 billion and a 30.4% pretax margin. Net new assets hit a record $232 billion and fee-based flows a record $80 billion. IPO-related flows accounted for just over half of net new assets, and management said its retention of those assets is improving as it builds advisor-led relationships with newly minted wealth. This points to a key connection between Morgan’s investment banking position and the Wealth business.

Year to date, net new assets total roughly $0.5 trillion. Deposits rose nearly $30 billion sequentially to $465 billion, an intentional move to grow the bank, with the funding benefit expected to show up over the course of 2027. Net interest income of $2.2 billion dipped modestly, but management expects a modest increase in the fourth quarter and expansion next year on loan growth. Pick summed it up: $1 trillion of net new assets over the last three years, following $1 trillion in the three years before that.

Bank of America

Bank of America reported net income of $6.9 billion, or $0.91 per share. Excluding a $1.2 billion regulatory settlement charge that is not tax deductible, net income was $8.1 billion, or roughly $1.08 per share, up from a year ago. Revenue rose about 3% to roughly $30 billion as 8% growth in net interest income to $16.6 billion and 17% growth in asset management fees more than offset lower investment banking and trading revenue.

Investment banking fees, excluding self-led deals, were about $1.8 billion, down from a strong year-ago quarter on lower advisory and debt underwriting. Year to date, however, fees are up 16%. CFO Alastair Borthwick acknowledged the sharp move in rates caused buyers and sellers to pause and reset valuations, but said pipelines remain strong and grew during the quarter, aided by the capital needs of AI companies and their surrounding ecosystem. He also noted the bank ranked third in announced M&A during the quarter.

Sales and trading revenue fell 5% to $5.1 billion. Equities had a record third quarter, with revenue up 10% to $2.5 billion on prime financing but those gains were offset by declines in fixed income, currencies and commodities revenue. Gains in FX and commodities were more than offset by mortgages, munis and credit, where the 85-basis-point jump in rates during the quarter led clients to step back. Here’s the thing: Those are Bank of America’s leading franchises, which is why it was hit harder than peers

Global Banking revenue was flat at $6.2 billion and net income dipped modestly to just under $2 billion given softer investment banking fees, but the underlying commercial business was strong. Commercial loans grew in every segment, from small business to the largest corporations, international commercial loans rose 15% and middle-market growth was broad-based across real estate, technology, healthcare and biopharma. The commercial bank added more than 300 new clients and in September launched a generative AI tool for prospecting and onboarding.

Let’s remember, though, that JPMorgan flagged growing caution among middle-market companies on Tuesday. Following Wednesday’s hotter-than-expected September CPI report, we are seeing CME FedWatch Tool probabilities shift higher, and if Thursday’s September PPI report shows the same, odds are those probabilities will lift further. That suggests the commercial banking side of the business will feel the brunt of a higher interest rate environment on its mortgage and credit businesses. This make us very interested in the next Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending that should be published in early November.

Similar to what we saw above with Morgan Stanley, BofA’s Wealth management revenue was a standout. Revenue for Q3 2026 rose about 13% to $7.1 billion, and net income climbed 22% to more than $1.5 billion with a pretax margin approaching 29%. Client balances topped $5 trillion for the first time, AUM rose 12% to roughly $2.4 trillion and net client flows were about $38 billion, including roughly $20 billion of AUM flows.

BofA’s $1.2 billion penalty charge, equal to $0.17 per share, relates to anti-money laundering and financial crime compliance and resolves the penalty portion of a 2020 cease-and-desist order. Management stressed there is no asset cap or other constraint on the business, and that remediation costs, which have run at roughly $185 million a quarter, are already in the expense run rate. Moynihan said the bank now has clarity on the metrics regulators want to see and is “all set,” with remediation consultants expected to roll off over time.

During the earnings call Q&A session, it was apparent that Wall Steet analysts weren’t entirely satisfied, calling it a confidence issue. Along with adjusted expenses up nearly 7% year over year, that prompted questions about whether Bank of America can still deliver 200 to 300 basis points of operating leverage. Management reiterated its 200 to 300 basis point operating leverage target for the medium term. We’d note headcount is down roughly 3,000 year over year, and the bank expects AI benefits to grow from $200 million to $300 million this year to about $700 million next year.

Bank of America reiterated full-year 2026 net interest income growth of about 8% and now expects 2027 growth of 8% or more, above its original 5% to 7% medium-term range. That outlook assumes Fed rate hikes in December, March and June, and includes an expected drag from the markets business, which is liability sensitive. In other words, core banking NII growth should be higher than 8%.

Given those prospects and the more than $15 billion remaining under BofA’s current share repurchase program following the $1.5 billion bought back in Q3 2026, we suspect management will be putting that program to work in the coming days and weeks.

Connecting the Dots

Across all four banks, equities trading was the clear winner, fixed income was the weak link and investment banking pipelines remain healthy despite a September pause tied to higher rates. Morgan Stanley’s wealth machine and equities franchise did the heavy lifting, and its fourth-quarter setup hinges on whether the IPO calendar and sponsor activity pick up.

At Bank of America, the core banking franchise, from the consumer to the commercial bank, is firing and the NII outlook is improving. The same comment above about Morgan and investment banking applies to BofA as well. The larger question is whether investors can look past the fixed income mix and the penalty, and in our view, that will come down to management delivering on operating leverage in the current quarter and flexing its share repurchase program.

While it would be easy to use the management credibility issue to punt BofA shares, we would argue the 23% fall since early August factors much of that into the stock price, which following Tuesday’s earnings reaction is well into oversold territory. Fortunately, we trimmed back our BAC exposure back in July, locking in a 111% gain on that slug of shares.

We’ll let the market overreact in the short-term and instead focus on the pace of investment banking activity, keeping on eye on interest rates and what the October SLOOS report reveals. As we have a clearer read on those items and what they mean for business activity at Morgan Stanley and Bank of America, we’ll plot our next move. We may not bottom tick the shares in the near-term, but if and when we make a move, we’d rather make a higher conviction one. That will require a clearer picture on investment and commercial banking activity.

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At the time of publication, TheStreet Pro was long BAC and MS.