Sometimes, Wall Street needs a cull. One such moment arrived seven years ago, when firms like Morgan Stanley and Goldman Sachs faced up to the realization that trading fixed-income securities was not the money-spinner it had been in the past. Heads rolled. Now big banks are bracing for another big adjustment, as the surge in revenue created by two years of wonky markets and exuberant dealmaking comes to an end. This time the cuts are likely to be shallower, but still traumatic.

Wall Street firms’ workforces have swelled along with their coffers since the end of 2019. Morgan Stanley has added around 18,000 staff, an increase of 30%. Goldman Sachs employs 8,700 more, while JPMorgan’s corporate and investment banking division has expanded by around 13,000 people. In total, those companies along with Bank of America and Citigroup have boosted their ranks by 10%, according to figures from their public filings.

But traders and advisers eat what they kill, and there’s now less prey to be had. Revenue from trading and dealmaking is falling precipitously. Investment bank Jefferies Financial on Wednesday reported a 32% year-on-year decrease in revenue for its fiscal second quarter. JPMorgan’s investment banking chief Daniel Pinto has warned deal-related fees could fall 50% in the three months to the end of September. Wall Street looks “staffed for optionality,” as Morgan Stanley boss James Gorman put it in 2016, after axing one-quarter of his firm’s bond traders.

Granted, some big American investment banks have scarfed the lunch of less successful rivals like Credit Suisse and Deutsche Bank, adding staff in the process. Even so, while overall income has risen by 40% since the end of 2019, the 12 biggest firms now have the same number of what are known as “front office producers” as they had then, based on Coalition data from the end of March. Effectively, banks just squeezed more rain from the same rainmakers – around $4.2 million per person in 2021 compared with under $3 million before the pandemic.

So what are all those extra people doing? Many of them are software engineers, hired to make banks more lean and customers more sticky. Goldman has been staffing up its consumer bank, Marcus. JPMorgan moved some payments staff into its investment banking unit in 2020. These people cost money, but many don’t directly bring it in. Acquisitions have beefed up headcount too: Morgan Stanley acquired around 6,000 people when it bought online broker E*Trade and asset manager Eaton Vance.

The result is a coming quandary. Banks have more mouths to feed out of what’s fast becoming a smaller trough. In 2019, a great year for sales, trading and deal-broking, Goldman, Morgan Stanley, JPMorgan, Bank of America and Citi collectively earned $107 billion of revenue. In the four quarters to the end of June the same quintet collectively brought in $156 billion, based on data from their public filings. The correction in markets so far this year suggests the top line may head back to where it was before.

The first line of defense against falling revenue at investment banks is to pay people less. Employees are already bracing for stingy bonuses. But if revenue levels are permanently reduced, banks will have little choice but to cut staff. One response is to let people leave and not replace them. That’s not ideal: Banks end up losing people they’d rather not, and testing the patience of those that remain. Even in an industry that is shrinking, talented dealmakers and traders are finding new employers with ease. At the end of July, vacancies in finance and insurance were more than 70% higher than the five-year average, according to U.S. Labor Department surveys. JPMorgan’s Pinto and his boss Jamie Dimon have both suggested that hard times are great for snapping up good people at relatively attractive prices.

The alternatives aren’t attractive either. Laying off technology folks puts a bank at risk of being left behind in the shift to digital finance, and eats into future efficiency gains. All the big firms have other divisions that could do more heavy lifting, such as Morgan Stanley’s wealth business, Goldman’s consumer bank, Citi’s credit card and trade financing business and the colossal commercial banks of JPMorgan and Bank of America. Each of those will face its own challenges from slowing economic growth and deteriorating credit quality.

If workforces can’t absorb the blow, shareholders will. They’re already primed for some discomfort – the big financial firms’ share prices have fallen one-third or more since early 2022. That’s not much more than the broader S&P 500 Index, however. Goldman and Morgan Stanley both raised their targeted returns on equity to around 15% earlier this year. Citi boss Jane Fraser’s recent goal of a 12% return on tangible equity is lower, but already ambitious for a company struggling to turn itself around.

That leaves room for disappointment, as tumbling revenue butts against workforces that are difficult to reduce in size. The bank most likely to wield the axe might be Goldman, which has returned to its “rank-and-yank” model of jettisoning weak performers. Yet even that exercise is only likely to shrink the workforce by little more than 1%, according to a person familiar with the situation. Cutting staff in a bad market is tough for Wall Street bosses; having nobody to cut is tough on investors.

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