Wall Street Had a Red-Hot Year, But Can It Last?

A white-hot market for deals, strong capital markets and steady demand for financial services from wealthy customers have led to record results at large banks. Goldman Sachs Group Inc. In the U.S., revenue reached $46.7 billion as of September 30 this year and Morgan Stanley booked $45.2 billion, both record highs. The last quarter of the year is also expected to be strong for the revenues of the banks.

Bank stock prices have followed suit, easily beating a broader market that has enjoyed itself a record multiple. The Nasdaq Bank Index is up about 32% for the year, beating the S&P 500’s 22% rally. Worries about the Omicron version sold the stock on Monday, but Goldman is still up 41% for the year and Morgan Stanley is up 39%.

Still, analysts do not agree that the banks’ fast pace of deals may continue. Goldman and Morgan Stanley have mined huge trading revenue during wild pandemic markets, but analysts are still trying to figure out what the new normal in trading looks like.

Analysts expect Project Goldman to generate $48 billion in revenue next year, which is still strong by historical standards but 18% below its 2021 full-year projection. He also expects Goldman’s 2022 earnings per share to decline by about a third.

Analysts expect a lot of downside at Morgan Stanley, but they still expect lean results in 2022, according to FactSet.

Bank executives have recently highlighted the risks to their business. On a conference call in October, Goldman CEO David Solomon identified several key factors that could slow future economic growth, including inflation and COVID-19 variants.

Since then, inflation has hit a nearly four-decade high. The rise of the Omicron variant has led to another surge in Covid-19 cases. Morgan Stanley CEO James Gorman predicted in a CNBC interview last week that the virus would be a factor for much of next year. JPMorgan Chase & Co said last week that its Signature Healthcare conference, which has long been the focus of deal-making activity, would be held online due to COVID concerns.

But some analysts are optimistic that even if business slows, bank stock prices may not necessarily follow suit. “It’s no stretch to say that Morgan Stanley is an above-average growth story,” said Keith Horowitz, an analyst at Citigroup. He rates the shares as a buy earlier this month, with a new share Price target is over $115. Next 12 months. (Morgan Stanley closed Monday at $95.37.)

He expects half of Morgan Stanley’s revenue to come from wealth management in 2023, up from 40% today. Earnings from that business are more predictable than investment banking or trading and deserve a higher income multiplier, he said.

Goldman also has an opportunity to grow its own wealth management and consumer finance offerings, which account for just 12% of revenue so far this year. Mr. Horowitz rates Goldman’s shares as a buy with a price target of $480. (Goldman closed Monday at $371.61.)

In addition, higher interest rates could lead to a more volatile capital market next year, which will boost trading revenue for banks.

“We think bank stocks are the right place to be,” said Mr. Horowitz.