Goldman Sachs and Morgan Stanley have both been hit hard

Goldman Sachs and Morgan Stanley have both been hit hard by the deal drought

New York CNN —

Don’t we make a deal? Leading investment banks Goldman Sachs and Morgan Stanley on Tuesday reported sharp declines in sales and profits for the fourth quarter, largely due to a lack of merger activity and IPOs in the last three months of the year.

Goldman Sachs (GS) earnings missed their biggest lead since the third quarter of 2011. Goldman Sachs (GS) revenue fell 16% in the fourth quarter and earnings fell 66%. Morgan Stanley (MS) revenue fell 12% year over year, while earnings fell nearly 40%.

Goldman Sachs CEO David Solomon said in the company’s earnings announcement that the company is facing “a challenging economic environment.” Morgan Stanley CEO James Gorman called it “a tough market environment.”

Goldman Sachs said investment banking fees fell 48% in the fourth quarter from the same period in 2021 as acquisition activity slowed and fewer companies tried to raise money by selling stocks or issuing debt. Morgan Stanley was also hit by the slowdown, with investment banking revenues falling 49% year over year.

Research firm S&P Global Market Intelligence said Tuesday that just 20 IPOs made it to market in the United States in the fourth quarter of last year, up from 234 in the fourth quarter of 2021.

Despite a strong market rebound in October and November, stocks ended the fourth quarter with a thud and fell in December. And Wall Street experienced its worst year since 2008. That also made companies less willing to seek acquisitions.

“M&A activity in the fourth quarter of 2022 marked a weak end to a weak year in North America as rising interest rates and a slowing economy prevented companies from expanding,” S&P Global Market Intelligence said in a report.

However, Morgan Stanley’s overall revenue and earnings beat analysts’ forecasts, while Goldman Sachs’ earnings also missed Wall Street targets. Shares of Morgan Stanley are up about 7% in midday trade on Tuesday. Goldman Sachs, a Dow component, fell nearly 7%.

However, both investment banking titans reported some bright spots. Morgan Stanley said revenue from its wealth management unit was up 6% year over year.

Goldman Sachs also posted strong revenue gains for its small, consumer-focused banking business. However, Goldman Sachs said in a regulatory filing last week that the division has lost more than $3 billion since 2020.

During a conference call with analysts on Tuesday, Solomon said Goldman Sachs would no longer be offering new loans on its Marcus consumer platform, adding that the company had “limited our ambitions regarding our consumer strategy.”

Both Goldman Sachs and Morgan Stanley are trying to attract more “Main Street” clients to expand beyond retail, investment banking and other traditional Wall Street businesses.

But it’s been a tough time for all financial services companies. Rising interest rates, falling real estate prices and concerns about an imminent recession are hitting all banks hard. JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC) all reported mixed results last week, giving a mostly cautious outlook for the economy.

Still, Gorman hoped there would be a resurgence in deals later this year. He said he believes companies will be more willing to make acquisitions or go public once the Federal Reserve stops raising interest rates – which many investors believe could happen later this year, when inflationary pressures continue to ease.

“I’m very confident that when the Fed pauses, deal and underwriting activity will pick up. I’d bet all year on that,” he said during Morgan Stanley’s conference call with analysts.