Goldman Sachs Stock Is Gaining an Edge on Morgan Stanley. Here’s How.

So far this year shares of both Goldman (ticker: GS) and Morgan Stanley (MS) are running neck-and-neck, shedding 12%. Even with those losses, both banks’ stocks have fared better than the KBW Nasdaq Bank Index (BKX), which has lost a quarter of its value amid this year’s tumult in the sector.

However, their latest earnings show a contrast between the two. Both banks topped expectations on the top and bottom lines during the third quarter, but when looking under the hood, Morgan Stanley fared worse. And Wall Street has been unforgiving, with Morgan Stanley stock suffering its worst decline on Wednesday since June 11, 2020, sliding 6.8%. Goldman, which reported Tuesday, had a more modest drop on its earnings day, slipping 1.6%, and closed 2.4% lower Wednesday.

What is more remarkable about Goldman’s recent outperformance vis-à-vis Morgan Stanley is its comeback story from a rocky few years. After an embarrassing—and costly—yearslong foray into consumer banking, Goldman is finally calling uncle. Over the past few months, it sold its mass-affluent personal financial management business, and it took a $506 million write-down on the sale of consumer lending platform GreenSky, which it only acquired last year. While Wall Street usually shuns losses, it appears relieved to see Goldman cut bait.

Morgan Stanley, meanwhile, hasn’t done anything wrong, but it has investors wondering what comes next. The bank smartly reorganized its business after the Great Recession to be more focused on wealth management, which is a more stable source of revenue than volatile businesses such as deal making and trading. Morgan Stanley also made some impressive acquisitions—E*Trade and Eaton Vance—to achieve this goal. With shares up 60% over the last five years, compared with Goldman’s 33% advance—coupled with the looming exit of long-term CEO James Gorman—investors are wondering what can propel Morgan’s stock further. 

And for right now, Goldman shares look enticing, trading at 1.1 times tangible book value, compared with 1.9 times tangible book at Morgan Stanley.

Here’s how the two banks stack up against each other:

Profit and Revenue: At Morgan Stanley, profit fell 8.5% in the third quarter from the year-ago period, while Goldman Sachs, taking a loss on its GreenSky sale, saw a 33% drop in profit. On revenue, Morgan Stanley came out ahead, with a 2% gain, while Goldman saw a 1% drop.

Investment Banking: This is one of the more stark differences between the banks. Goldman saw investment banking revenue tick up 1% to $1.6 billion in the quarter, as higher revenue in debt and equity underwriting made up for a 15% decline in advisory revenue. Morgan Stanley fared far worse. Investment banking revenue fell 27% to $938 million as advisory and debt writing revenue both plunged by more than 30%.

Despite the stark differences between the two banks, they both sounded equally optimistic about the future. 

“We are seeing increasing evidence of M&A and underwriting calendars that are building,” Morgan Stanley’s Gorman said, adding that he expects “most of the activity to materialize in 2024.”

“I’m encouraged by the prospect of a wider reopening of capital markets. If conditions remain conducive, I expect the continued recovery for both capital markets and strategic activity,” David Solomon, chief executive at Goldman, said Tuesday.

Trading: Both banks have had to contend with a challenging trading environment when markets have been volatile, and savers can gain 5% just by putting cash in money markets.

At Goldman, that meant total trading revenue was little changed from the year-ago quarter—even as fixed-income revenue fell by 6%, while equity trading climbed by 8%. Trading revenue came in ahead of expectations at Morgan Stanley, but was down 4% year over year. An 11% drop in fixed-income trading at the bank wasn’t enough to make up for a 2% gain in equity trading.

Wealth and Asset Management: Wealth management, the usual bread-and-butter for Morgan Stanley, underwhelmed as a 5% gain in revenue came in below expectations. Even worse, the unit had only a $36 billion increase in net new assets in the third quarter, well below the rate of recent quarters. So far this year, the division has had $235 billion in net new assets.

The story wasn’t great at Goldman either, but Wall Street appeared to be OK with the bank being in restructuring mode. Revenue in the bank’s asset and wealth management business fell 20% as it took write-downs on equity investments.

It might be too early to call victory on Goldman’s comeback, but in Wednesday’s trading, its shares were certainly looking more enticing to investors.

Write to Carleton English at [email protected]