When the CEOs of the largest investment banking firms revealed their fourth-quarter earnings on Tuesday, they gave a positive assessment of the state of the U.S. economy and deal pipeline, but they also cautioned about potential threats to the emerging recovery.

The income from equity trading at Goldman Sachs, opens new tab, increased by 26% in the fourth quarter compared to the same period last year, driving up shares by more than 1% in early trade. The stock gave up its early gains and was trading flat later in the day.

On the other hand, investment banking revenue increased by 5% at competitor Morgan Stanley, opens new tab, while trading revenue remained mostly unchanged. The stock dropped by almost 5%.

According to Danni Hewson, head of financial research at AJ Bell, “it is obvious who is going to be the king of Wall Street tonight and which one is going to be pulling out hairs because the investment banking sector is fiercely competitive and rivalry intense.” Bell said that although Morgan Stanley was “in the doghouse” for missing profit projections, Goldman exceeded expectations.

The optimism of CEOs was not shared by investors. Over 1% was lost by the KBW index of bank shares, opens new tab.

“Market sentiment was most positive at the end of 2023 as inflation was going down, interest rate cuts were expected,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. “But now there is some realism seeping in and there are concerns if this year will pan out as expected.”

Although some market participants are lowering expectations for rate reduction, anticipation that the United States would avoid a recession as the Federal Reserve advances towards dropping interest rates later this year has recently caused stock markets to rise. At investment banks, lower borrowing rates usually encourage trading and dealmaking.

“The U.S. economy proved to be more resilient than expected despite a number of headwinds to growth, including a significant tightening of financial conditions, regional bank failures and an escalation of geopolitical tensions,” said Goldman Sachs CEO David Solomon. While the picture for 2024 is improving, “we’re going to continue to take a cautious view,” he said.

Notwithstanding the optimism, worries about the state of the US economy and geopolitics persist.

Goldman’s trading income increased, but its $1.65 billion in investment banking fees decreased by 12%.

On a conference call, Ted Pick, the bank’s new CEO, informed analysts that Morgan Stanley’s revenue from investment banking increased more than that of its competitors and that the bank had a more optimistic forecast for the year.

He stated, “Our base case for the coming year is constructive,” but he also mentioned two significant negative risks: growing geopolitical tensions and uncertainty about the direction of the US economy.

Last year, global M&A activity reached a ten-year low, but according to Dealogic, there were some indications of a rebound in the fourth quarter as deal volumes increased by 19%.

Profits at other lenders, such as JPMorgan Chase, opens new tab, Bank of America, opens new tab, Citigroup, opens new tab, and Wells Fargo, opened new tab, were muted by one-time charges and expenses.

The net profit of PNC Financial Services Group, which opened a new tab and released earnings on Tuesday, decreased due to extra charges.

The banks have been setting aside funds in the fourth quarter to refill the government’s deposit insurance fund (DIF), which took a $16 billion hit after Silicon Valley Bank and two other lenders failed last year.

“They are stronger years than 2023 and it’s good to have it behind. It wasn’t their strongest year but the banks managed it well,” said Chris Marinac, director of research at financial adviser Janney Montgomery Scott.

(Adapted from Reuters.com)

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