In recent weeks, we've seen quite a sell-off in the stock market, with the S&P 500 index briefly entering correction territory on March 13. This downturn has some investors heading to the exits, but it also creates intriguing buying opportunities as some stocks are now trading at discounted levels.
Morgan Stanley (MS -4.28%) stock, for instance, trades down about 14% over the past month and just under 4% year to date. Those downturns come even though Morgan Stanley management has expressed optimism about a recovery in its core business over the past year. They also come because recent actions by the Trump administration may have implications for financial institutions.
Given the mixed signals and price volatility, is now a good time to consider purchasing shares of Morgan Stanley? Are further stock price declines likely in the near- to medium-term?
NYSE: MS
Key Data Points
Investment banking rebounded in 2024 following a couple of tough years
Morgan Stanley is one of the largest investment banks in the U.S. It has traditionally relied on its investment banking segment (which advises companies considering IPOs, undergoing mergers, or making significant acquisitions) to help drive its growth. This segment is somewhat vulnerable to changes in the broader economy. In recent years, the bank has expanded its service offerings into asset and wealth management to help diversify and stabilize its earnings.
Investment bankers dealt with a cool period for initial public offerings (IPOs) and mergers & acquisitions (M&As) in 2022 and 2023 as a result of the Federal Reserve aggressively raised its benchmark interest rate to bring elevated inflation back in check. As a result, many companies put off making significant deals and fewer of them initiated public stock offerings.
But in 2024, interest rates stabilized somewhat, which helped improve the backdrop for deal-making. That resulted in an earnings boost for investment banks.
Data by YCharts.
Expectations for a dealmaking rebound are waning
"We are in the early stages of a multiyear investment banking-led cycle," Morgan Stanley CEO Ted Pick told investors during the Q2 2024 earnings call back in mid-July 2024, adding that the company was enthused about the potential. Some investment banks hoped that the regulatory and macroeconomic environment would favor them under President Donald Trump. However, the outlook has gotten more murky in the wake of recent actions by the new administration. In one of its first tests, the Department of Justice under Trump blocked Hewlett Packard Enterprise's $14 billion deal to acquire Juniper Networks.
The administration also said it would continue to use the M&A guidelines established during the Biden administration. Under former Federal Trade Commission (FTC) Commissioner Lina Khan, the FTC and the Department of Justice issued strict guidelines that focused on antitrust and the importance of competition and choice for consumers.
Over the past several years, some major deals have been called off after facing regulatory scrutiny, including the attempted mergers of JetBlue and Spirit Airlines, Kroger and Albertsons, and Capri and Tapestry.
In addition, there are fears about the economic outlook amid uncertainty around Trump's tariffs and the possibility that stubborn inflation may head higher. Analysts at Morgan Stanley reduced their stock price targets for several banks, including Goldman Sachs, Jefferies Financial Group, and Bank of America. The analysts noted that the "robust capital markets rebound we expected in 2025 is not playing out as anticipated."
Image source: Getty Images.
Buy, sell, or hold?
Investment banks are experiencing turbulence, and seeing fewer deals in the first quarter than anticipated. The unpredictability surrounding trade policies and their impact on the economy has added another layer of complexity to the picture. As a result, investment banks like Morgan Stanley could face a more challenging year than expected. That said, Morgan Stanley has done a good job of diversifying into other activities like asset and wealth management. Last year, its income from these businesses was $6.75 billion, compared to $6.66 billion from investment banking and trading.
For those looking to build a long-term position, the stock is definitely trading at a discount. However, I'd be inclined to hold off until we see more momentum on M&A and IPOs, where activity remains subdued.
That doesn't mean you should rush to sell shares if you already own them. Morgan Stanley is priced at 14.9 times its earnings, a reasonable valuation slightly above its 10-year average. While the near-term outlook could present some challenges to the company, I believe Morgan Stanley remains a hold for long-term investors.
