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Wall Street’s investment banking titans closed 2024 on a high. Goldman Sachs and Morgan Stanley will most likely announce strong revenue growth in full-year results due Tuesday and Wednesday respectively, as an M&A uptick kept their dealmakers busy. But there’s a hitch: bond-market chaos could slow everything down.

Wracked by rising interest rates, a bleak 2022 sliced Goldman’s net earnings roughly in half year-over-year. The slide continued in 2023, and the recovery is only now showing. Analysts expect both Goldman CEO David Solomon and Morgan Stanley boss Ted Pick to turn in a roughly 12% year-over-year bump in net revenue for all of 2024, according to Visible Alpha. With M&A volume jumping 10% last year according to LSEG, helped by a 24% rise in debt-hungry buyouts, the pair’s investment banking fees should see a stronger boost of 24% and 35%, respectively, using consensus forecasts.

Both Solomon and Pick have pitched a more fundamental shift, touting their ability to derive less lumpy income from areas like wealth management. The hope is to win a higher valuation. With both firms’ share price as a multiple of expected earnings doubling since 2019’s start, it looks to be working.

There are wrinkles, however. Solomon’s definition of “durable” earnings includes the securities financing part of his giant trading division, which seems like a stretch: lending to hedge funds and asset managers can bring volatility. Monday’s news that Goldman is creating a financing unit dubbed the capital solutions group sharpens the pitch. By combining in-house private asset management with traders arranging, say, an asset-backed financing, the firm can argue that it’s catching the boom in private credit. Insurers are ravenous for this kind of debt, and the likes of Apollo Global Management are using it to undergird a range of novel financings. Public U.S. asset-backed security issuance rose 44% in 2024, according to trade association SIFMA.

Morgan Stanley’s in-house private credit operation is smaller than Goldman’s. Still, Pick is catching up in other ways, narrowing the gap between his dealmakers’ revenue and Solomon’s. His wealth management arm, too, probably saw a juicy return on equity of around 20% in 2024, analysts think. Brokers are penciling in just 10% for Goldman’s asset and wealth management division, Visible Alpha data shows.

Yet the boom-bust cycle is rearing its head. Amid inflationary fears and dimming hopes of monetary easing, interest rates are spiking on long-term U.S. government bonds, in turn pushing up rates for companies. Interest costs on single-B debt, a proxy for the credit that backs leveraged buyouts, are creeping up, threatening to dampen private equity’s appetite. Solomon and Pick are singing the right tune. But the old one of changeable markets could drown them out.
 

Context News

Investment banks Goldman Sachs and Morgan Stanley are due to report earnings for the fourth quarter of 2024 on Jan. 15 and Jan. 16, respectively. Analysts expect total revenue, net of interest expenses, to hit $52 billion at Goldman Sachs, according to Visible Alpha, implying an annual growth rate of more than 12%. For Morgan Stanley, the forecasts imply just under 12% year-on-year revenue growth in 2024. Investment banking fees will end the year up nearly 24% and 35% respectively at Goldman and Morgan, according to the same analyst estimates. On Jan. 13, Goldman Sachs announced that it would form a new unit, dubbed the capital solutions group, that would span its capabilities in both investment banking and asset management to provide financing pitches that include private loans.

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