What Investment Banking’s Revival Tells Us About the Economy

Smart investors know the stock market isn’t the economy. In other words, stocks currently trading near record highs don’t mean that the U.S. economy i

Investment banking activity can be interpreted similarly. The many millions of dollars that banks generate from their diverse services for big companies and wealthy clients is an imperfect way to gauge economic health. But it is an important piece of the puzzle to consider.


The latest quarterly reports from big investment banks highlight that although deal volumes are still running below long-term averages, dealmaking is resuming and revenues are surging after two stagnant years spurred by high interest rates.

Now that borrowing is becoming less expensive as central bankers lower rates and a healthier economic picture takes shape, companies are calling up their bankers for help.

That’s for all manner of things: selling more stock and issuing bonds, taking a company public, or working on an acquisition or sale. Underwriting activity in the equity and debt markets is keeping bankers busiest right now, firms’ results showed.

That translates to companies feeling better about their positions in the economy than before, giving them an appetite to make big strategic moves without worrying about market reaction. That attitude adjustment is a big positive for the economy these days.

“Strong results in investment banking likely reflect greater confidence in a ‘soft’ or ‘no’ landing economy scenario,” said Chris Wolfe, head of North American banks for Fitch Ratings.

The latest investment banking results reflect “a combination of pent-up demand as companies postponed actions during the Fed’s hiking cycle,” and higher confidence that the economy will avoid a recession, “which was assumed to be short and mild even if there was one,” Wolfe said.

Sharon Yeshaya, the chief financial officer of Morgan Stanley, said on the firm’s earnings call on Wednesday that demand has been broad-based and that capital markets’ recovery is in the early stages.

“Corporate activity is gaining momentum and the desire among sponsors to transact is steadily materializing, not only domestically but also abroad,” she said. The company reported investment banking revenue jumped 56% from a year ago to $1.5 billion, driven by higher fixed-income underwriting.

Banks across Wall Street reported similar gains. Goldman Sachs’ investment banking fees of nearly $1.9 billion were up 20% from a year ago, driven by increased debt and equity underwriting.

Lower rates, narrowing credit spreads, and more fulsome merger and acquisition pipelines are driving higher activity in debt capital markets, noted Keefe, Bruyette & Woods banking analyst David Konrad.

Consumers’ solid health—even as economists monitor weak loan growth and signs of a spending slowdown—is also giving companies assurance.

Increased bank debt and equity underwriting suggest that companies “are seeing this economic strength, and are seizing the opportunity to build up inventories and make capital expenditures through capital raising activities” to support growth, RBC Capital Markets bank analyst Gerard Cassidy said.

Robust investment banking reports underscore that corporations’ confidence in the economy is improving. They are yet another favorable signal to consider as investors navigate an economy that is on solid ground—but only starting to come down from the highest interest rates in decades.

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com

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