Brokerage Oppenheimer announced rare downgrades of major U.S. investment banks on Tuesday, cutting Goldman Sachs and Morgan Stanley to 'underperform' from 'perform' in conjunction with its Q2 bank group preview. According to reports from The Economic Times, the brokerage also reduced Citigroup and Bank of America to 'perform' from 'outperform', sending shares down approximately 1.3% each. Morgan Stanley shares declined 1.4% in early trading while Goldman Sachs fell about 1% following the downgrades. As per Oppenheimer, the firm isn't predicting an imminent hit to Goldman's or Morgan Stanley's results, but sees no immediate catalyst to break their growth-and-returns story. The bigger issue is valuation: once a sector is seen as fully valued late in the cycle, investors often become less willing to pay a premium, leading to a slow 'de-rating' where the price-to-earnings multiple falls.
As reported by The Economic Times, Oppenheimer believes investment banks have moved into the later part of an expansionary cycle, stating there is nothing in the immediate future to drive these stocks off their growth trajectory. The brokerage analysts wrote: "While the cycle may well go on for another 12-18 months or more, we'd rather not wait around for the warning signs to appear, and thus particularly in the case of the investment banks, we are more inclined to take the money and run." Oppenheimer is raising estimates for Q2 primarily because of a strong outlook for trading, noting that its 2027 estimates go up the most for Goldman and Morgan Stanley because they are the purest plays on trading and investment banking. However, the firm adds that it doesn't find the valuations 'compelling' despite the increases. Instead of large-cap banks, the firm recommends commercial banks like US Bancorp and PNC Financial Services given they are in a relatively early phase of expansion.
According to The Economic Times, Oppenheimer recommends investors reallocate funds from large-cap banks to alternative asset managers including Ares Management, Blackstone, and KKR. The brokerage suggests that while shares of alternative asset managers have lagged this year as investors grow wary of private-credit exposure and redemption risks, those concerns have been overdone by analysts. Oppenheimer advises investors to "maintain their financial exposure by re-deploying the funds raised into the Alts." The firm views this as a strategic shift, noting that when investors start treating today's strong returns at banks as closer to a peak, the risk shifts from 'earnings suddenly fall' to 'the market pays less for the same earnings,' which can drag on share prices even without a clear catalyst.
