Trailing S&P500 By 31% Since The Start Of 2023, Will Morgan Stanley Stock Close The Gap?

Morgan Stanley’s stock (NYSE: MS) has gained roughly 1% since the start of 2023, as compared to the 32% rise in the S&P500 over the same period. Further, the stock is currently trading at $86 per share, which is 10% below its fair value of $95 – Trefis’ estimate for Morgan Stanley’s valuation. 

Amid the current financial backdrop, MS stock has shown gains of 20% from levels of $70 in early January 2021 to around $85 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in MS stock has been far from consistent. Returns for the stock were 43% in 2021, -13% in 2022, and 10% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MS underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including V, JPM, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The investment bank outperformed the revenue estimate in the fourth quarter of 2023. It posted total revenues of $12.9 billion, which was marginally higher than the year-ago figure. While the non-interest revenues increased 5% y-o-y, it was almost offset by an 18% drop in the net interest income (NII). Notably, the non-interest income benefited from a growth in investment banking, trading, and asset management revenues. On the cost front, total expenses witnessed an unfavorable increase of 9% y-o-y. Overall, it resulted in a 35% reduction in the adjusted net income to $1.4 billion. 

The company’s top line grew 1% y-o-y to $54.14 billion in FY 2023. While the wealth management revenues increased 8% y-o-y, it was almost offset by a 5% decline in the institutional securities (including investment banking and trading) segment. In terms of expenses, total expenses as a % of revenues increased in the year, leading to a 19% decrease in the adjusted net income to $8.5 billion.

Moving forward, we forecast Morgan Stanley’s revenues to remain around $56.8 billion in FY2024. Additionally, MS’s adjusted net income margin is likely to improve in the year, leading to an adjusted net income of $9.82 billion and an annual GAAP EPS of $6.26. This coupled with a P/E multiple of just above 15x will lead to a valuation of $95.

[1] Returns as of 2/29/2024
[2] Cumulative total returns since the end of 2016

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