Morgan Stanley Q3 preview: Where next for MS stock?

When will Morgan Stanley release Q3 earnings?

Morgan Stanley will report third quarter earnings before markets open, at 0730 ET, on Friday October 14. A conference call will follow at 0930 ET on the same day.

Morgan Stanley Q3 earnings consensus

Wall Street forecasts Morgan Stanley will report a 10.2% year-on-year drop in net revenue to $13.24 billion and a 21% drop in EPS to $1.59, according to consensus numbers from Bloomberg. Adjusted EPS is expected to fall 26% to $1.51.

Morgan Stanley Q3 earnings preview

Most traditional US banks will see revenue climb this quarter as rising interest rates push up net interest income and earnings fall as loan provisions start to build once again, although Morgan Stanley is set to see both metrics fall. You can read more about what to expect from the wider sector in our US Banks Q3 Earnings Preview.

Morgan Stanley’s wealth management and trading activities should continue to grow during the third quarter, but its large investment banking arm as well as its investment management unit will offset this and lead to the bank reporting lower revenue and earnings this week. Morgan Stanley is more reliant on investment banking compared to the likes of JPMorgan, Wells Fargo and Citigroup.

The institutional securities division is forecast to report a 22% drop in net revenue to $5.80 billion and a 45% fall in pretax profit to $1.63 billion. Although its trading operations should continue to grow its topline thanks to volatile markets, with higher revenue from fixed-income trading set to counter a drop in equities trading amid the tough conditions for markets, this will be countered by the investment banking arm that is forecast to see revenue plunge over 57% from last year to $1.21 billion. Morgan Stanley has one of the larger equity capital markets operations among US banks and the fall will be the result of a 50% drop in advisory fees, a 76% drop in equity underwriting fees and a 40% fall in debt underwriting fees. The troubles are being caused by an uncertain economic outlook prompting companies to delay or cancel their plans to go public, while tighter financing conditions are also weighing on appetite for M&A and new debt issuance, resulting in lower fees for Morgan Stanley following the boom we saw last year. Meanwhile, the investment management unit is forecast to report a 5.7% fall in net revenue to $1.37 billion and a 25% fall in pretax profit to $277.7 million.

That will offset the profit growth from its large wealth management arm that is forecast to report a 3.6% rise in net revenue to $6.15 billion and an 8.8% increase in pretax profit to $1.67 billion. A 40% jump in net interest income, driven by higher interest rates, is expected to counter an 8% fall in revenue from asset management and a 10% fall in transactional income as client activity remains subdued compared to last year.

Another drag on profits will be the fact provisions for credit losses are starting to rise again as fears a recession could be around the corner, although Wall Street expects Morgan Stanley to build its reserves set aside for potentially bad loans by just $74 million in the third quarter, which is considerably less than some of the numbers pencilled-in for its rivals this quarter. For context, the Financial Times reported that the six largest US banks – including Morgan Stanley - are poised to set aside over $4 billion this quarter. Still, that $74 million will be three times the amount set aside the year before and will ultimately be a headwind against earnings.

One reason Morgan Stanley doesn’t need to set aside as much money as its rivals is because it has a much larger capital buffer, demonstrated by the fact its CET1 ratio stood at 15.2% at the end of June. That is among the highest of any major US banks and should allow it to maintain flexibility when it comes to share buybacks, which is something that can’t be said for all its rivals. Morgan Stanley completed a $12 billion buyback in the last quarter and launched a new multi-year programme worth up to $20 billion, while its dividend has also continued to grow when some such as JPMorgan and Citigroup – both of which were told to raise their capital buffers after the latest stress tests earlier this year - have been forced to keep theirs flat.

It is worth noting that we have some events that will be eagerly watched by markets in the days running up to the results that could influence the Morgan Stanley share price this week. Markets were briefly hoping last week that the Federal Reserve would start to pivot towards a more dovish stance, but these hopes were quickly dashed after the latest data showed rising rates are yet to feed through to the jobs market and several members of the central bank said rates would continue to rise to get inflation down. With that in mind, US inflation data on Thursday – the day before Morgan Stanley reports – will be the next key set of numbers that markets will use to gauge the Fed’s mood, with FOMC meeting minutes also out on Wednesday. You can read more about these events, which could prove influential on the share price of US banks, in our Week Ahead.

Where next for MS stock?

Morgan Stanley shares have fallen over 21% since the start of 2022, outperforming the Dow Jones US Bank Index that has fallen over 26%.

The stock has been testing a floor of $78.70 for the last two weeks, with shares having bounced back upon reaching this level. This must hold to avoid opening the door to $76.70, which emerged as a level of support back in March and April 2021 and again last May. Any fall below here would bring the 16-month low around $72.50 that we saw in June and July back onto the radar.

The first upside target is the 100-day moving average at around $83, in-line with the level of support-turned resistance that can be traced back to March. From there it can look to break above the last peak at $78.84 before eyeing a larger jump to the 50-day moving average that sits in-line with the ceiling that held throughout most of May.

The 27 brokers that cover Morgan Stanley see greater upside potential with an average target price of $94.61, implying there is almost 20% potential upside from current levels.

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