The Zacks Investment Bank industry is poised to benefit from robust trading income driven by heightened market volatility and increased client activity amid geopolitical and macroeconomic uncertainty. Investments in artificial intelligence (AI) and technology are expected to boost long-term efficiency despite short-term cost pressures. 

While underwriting and advisory businesses face near-term headwinds, the overall operating environment is gradually turning favorable. Hence, investment banks are expected to record decent top-line growth over time. So, industry players like Morgan Stanley (MS Quick QuoteMS - Free Report) , The Goldman Sachs Group, Inc. (GS Quick QuoteGS - Free Report) and Robinhood Markets, Inc. (HOOD Quick QuoteHOOD - 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, 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 Themes to Influence the Investment Bank Industry

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, attributable to several geopolitical and macroeconomic challenges. Further, President Donald Trump’s tariff plans have upended the near-term normalization of trading business. Market volatility and client activities have soared, and the trading desks will likely continue to witness a flurry of activity. Hence, investment banks are expected to record solid trading income in the upcoming period.

Underwriting and Advisory Businesses to Regain Momentum: After a prolonged slump in underwriting, IPOs and deal-making activity since 2022 due to geopolitical tensions and global macroeconomic uncertainty, signs of recovery have begun to emerge in advisory and underwriting businesses. This year started on an optimistic note, fueled by expectations of a strong investment banking rebound under a business-friendly Trump administration, with potential tax cuts and deregulation on the horizon.

However, early optimism about a sharp M&A recovery was tempered in April, as renewed tariff concerns and fears of a trade war triggered heightened market volatility. Since then, the operating environment has improved, supported by greater clarity on policy direction. As a result, deal-making momentum has resumed and could accelerate further if inflation continues to moderate and the Federal Reserve initiates rate cuts. While investment banks may still face short-term challenges in underwriting and advisory segments, the evolving macro backdrop is setting the stage for sustained top-line growth in the long term. 

Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising will likely aid the operations of investment banks. Industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to support clients with infrastructure development and new platforms. While 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 Bright Prospects

The Zacks Investment Bank industry is a 21-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #97, which places it in the top 39% 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. Since October 2024-end, the industry’s earnings estimates for the current year have been revised 5.8% upward.

Before we present few stocks that you may want to keep on your radar, 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 despite the recent turmoil. While stocks in the industry have collectively surged 34.1%, the S&P 500 composite has rallied 11.7% and the Zacks Finance sector has risen 19.9%.

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 2.81X, 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 13.14X and the median level is 13.91X.

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 5.37X and the median level of 4.68X for the same period are above the Zacks Investment Bank industry’s respective ratios.

Price-to-Tangible Book Ratio (TTM)


 

3 Investment Banks to Keep an Eye on

Morgan Stanley: This Zacks Rank #3 (Hold) 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, Morgan Stanley and Mitsubishi UFJ Financial Group, Inc. announced plans to deepen their 15-year alliance by merging certain operations within their Japanese brokerage joint ventures. The new alliance saw 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 has been 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 the company’s IB business, further strengthening its financials. The demand for both advisory and underwriting businesses is likely to rise as corporates become more comfortable with the current economic backdrop.

With a market cap of $225.7 billion, MS is expected to continue benefiting from its scale and business expansion efforts. Its shares have jumped 42% in the past 12 months. The Zacks Consensus Estimate for 2025 earnings implies year-over-year growth of 7.4%.

Price and Consensus: MS

Goldman: This Zacks Rank #3 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. The company also plans to ramp up its lending services to private equity and asset managers, and aims to expand internationally, which will likely support its growth over the long run.

Further, robust client engagement, backed by digital disruption and transformation trends, signs of growing M&A and underwriting pipelines and global expansion efforts will keep supporting 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 $212 billion. Over the past six months, the company’s shares have rallied 52.6%. The Zacks Consensus Estimate for ongoing-year earnings suggests growth of 8.8% on a year-over-year basis.

Price and Consensus: GS

Robinhood: HOOD, carrying a Zacks Rank #3, 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.

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 its 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 $73.5 billion, Robinhood is expected to continue benefiting from its business expansion efforts. Its shares have soared 310.8% over the past 12 months. The Zacks Consensus Estimate for 2025 earnings indicates a 12.8% year-over-year increase.

Price and Consensus: HOOD