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Goldman & Morgan Stanley: Record Results, Puzzling Valuations
16 Jan
Summary
- Goldman Sachs and Morgan Stanley reported strong quarterly results.
- Both banks now trade at multiples of book value exceeding pre-crisis levels.
- Despite higher valuations, current profitability remains lower than in 2007.
Wall Street giants Goldman Sachs and Morgan Stanley announced robust quarterly earnings, signaling a rebound in deal-making and trading activities. Goldman Sachs saw its net profit climb 12% to $4.6 billion, while Morgan Stanley achieved a 19% net income jump to $3.7 billion. These impressive figures have propelled their market valuations to new heights, with both banks now trading at multiples of book value that exceed their pre-financial crisis levels.
Despite this current financial success and elevated stock prices, a notable disconnect exists when comparing profitability. Goldman Sachs reported a nearly 15% return on equity last year, and Morgan Stanley exceeded 16%. These figures are substantially lower than their 2007 performance, when Goldman achieved nearly 27% and Morgan Stanley over 23%, indicating a less profitable operational environment today.
Morgan Stanley's increasing reliance on wealth management, which now constitutes nearly 55% of its revenue, offers a more stable earnings profile. While Goldman Sachs also designates a portion of its revenue as durable, a significant part still stems from its trading divisions. The market's current valuation premium, therefore, might be overestimating the persistence of these stellar alignments, overlooking the underlying differences in profitability and business models compared to the past.
