Morgan Stanley Tops Q2 Estimates, But Investment Banking Slips Put a Dent in the Shine

Trading and wealth management keep profits strong, yet rising credit costs and weak deal activity drag on shares

Morgan Stanley beat Wall Street’s expectations in the second quarter, reporting stronger earnings and higher revenues — but not without bruises. The investment banking giant leaned heavily on its trading desk and wealth management division to carry the weight, as its dealmaking arm stumbled once again.

The market liked the numbers at first glance, but not enough to ignore growing concerns. Shares dipped 1.27% Wednesday to $139.79, with investors weighing the risks of a sluggish investment banking rebound and rising credit provisions.

Revenue Up, Earnings Stronger Than Forecast

There’s no sugarcoating it — Morgan Stanley had a good quarter on paper.

Revenue hit $16.8 billion, a nearly 12% rise from $15 billion a year ago. Net income climbed to $3.5 billion, or $2.13 a share — easily topping analyst forecasts of $1.96 per share, according to LSEG.

CEO Ted Pick, who took over from longtime boss James Gorman earlier this year, sounded upbeat.

“Morgan Stanley delivered another strong quarter,” he said in a statement. “Six sequential quarters of consistent earnings reflect higher levels of performance in different market environments.”

It’s a fair point. The bank has managed to post solid results through rate hikes, market volatility, and choppy macro conditions.

Wealth Management Keeps Rising, Again

One of the most consistent growth stories at Morgan Stanley continues to be wealth management.

That division — which includes the legacy Smith Barney business and the more recent E*TRADE acquisition — posted record revenues of $6.9 billion. Client assets now total over $5.3 trillion.

What’s driving the boom?

A few things, actually:

• Steady fee-based income from ultra-high-net-worth clients

• Growing interest income on cash balances amid higher rates

• Digital onboarding and product expansion from the E*TRADE platform

This has been the pillar of the bank’s strategy over the last five years: shift from high-volatility investment banking revenue to stickier, more predictable wealth income.

And so far, it’s working.

Investment Banking Slips Again, Deals Still Dried Up

But here’s where the shine starts to wear off.

Morgan Stanley’s investment banking revenue fell 4% year-over-year. And while that’s not as bad as some quarters in 2023, it’s still not the rebound Wall Street’s been hoping for.

The firm cited “continued softness in equity and debt underwriting activity” as the key drag. And while M&A advisory fees showed some signs of life, they weren’t enough to lift the overall segment.

This isn’t unique to Morgan Stanley. Goldman Sachs, JPMorgan, and Citi have all flagged weak deal pipelines this quarter. But given Morgan Stanley’s pedigree in this space, the underperformance stings a little more.

Here’s a quick look at how Morgan Stanley’s major business lines performed in Q2:

Credit Provisions Raise Eyebrows

There was another red flag buried in the earnings: credit provisions.

Morgan Stanley set aside $507 million for credit losses in the quarter, up sharply from $279 million a year earlier. That jump caught some analysts off guard.

The bulk of that provisioning came from loans tied to the firm’s corporate lending and wealth management arms. Rising delinquencies and a few underperforming commercial loans seem to be behind the move.

One analyst on the earnings call pointedly asked whether this signals a broader deterioration in credit quality. CFO Sharon Yeshaya was quick to say the portfolio remains “solid” but acknowledged “pressure in certain commercial real estate exposures.”

It’s not panic time — not yet. But it’s something investors are now watching closely.

Stock Slips as Investors Digest Mixed Signals

Despite the headline beat, Morgan Stanley stock traded lower after the report. Not dramatically, but enough to suggest the market isn’t fully convinced.

One sentence stood out in Ted Pick’s comments: “Higher levels of performance in different market environments.”

It’s true, but it also sounds like code for: “We’re still figuring this out.”

Let’s be real — a 12% revenue bump is great. But when credit risks are rising and the bank’s traditional investment banking arm can’t find its footing, investors get a little twitchy.

Plus, the stock’s had a good run. Morgan Stanley shares are still up over 18% year-to-date.

What Wall Street Is Watching Next

With the Fed signaling it might start cutting rates later this year, capital markets activity should pick up. But should and will are two very different things.

Here’s what analysts are now focused on for the second half of 2025:

• Can investment banking finally rebound in Q3 and Q4?

• Will credit losses stabilize or get worse?

• How sticky is the wealth management growth in a falling rate environment?

• What’s the new CEO’s longer-term vision?

It’s not doom and gloom. But it’s not all roses either.