Financial reporting season "leads the way" for the banking industry giants suffered consecutive heavy blows! Morgan Stanley downgrades outlook for large US banks to "neutral"

Wall Street financial giant Morgan Stanley has lowered its stock rating for the US investment banking giant Goldman Sachs Group, Inc. (GS.US) and for the private banking and wealth management leader Northern Trust Corporation (NTRS.US), with the latter's rating lowered to "underweight". At the same time, Morgan Stanley raised the stock rating for the US commercial banking giant Bank of America Corp (BAC.US). More importantly, Morgan Stanley has revised its outlook for the overall prospects of the US large bank sector from "attractive" to "neutral". This also indicates that with the ongoing threat of Trump's tariffs before the upcoming earnings season, Bank of America Corp and other industry giants are facing another major headwind. The KBW Bank Index, which measures the benchmark performance of Bank of America Corp, fell over 13% last week and nearly 20% year-to-date. "In the current situation where Trump's tariffs far exceed market expectations, the global trade developments and trends have led us to significantly revise our baseline forecast for global GDP growth, casting the US stock market into a scenario of a potential recession and risks are escalating rapidly." Analysts Betsy Graseck and Ryan Kenny from Morgan Stanley stated in their latest research report. Earlier, another Wall Street giant, Goldman Sachs Group, Inc., in its latest research report released on April 6, significantly raised the probability of a US economic recession in the next 12 months to 45%, a drastic 10% increase from previous forecasts. The report also downgraded the GDP growth rate for the fourth quarter of 2025 to 0.5%, halving the original forecast. In the report, Morgan Stanley downgraded its rating for investment banking giant Goldman Sachs Group, Inc. from 'buy' to 'hold' and downgraded the stock rating for Northern Trust Corporation from 'hold' to the most negative rating of 'underweight'. The outlook for the large bank sector, including J.P. Morgan, Morgan Stanley, Goldman Sachs Group, Inc., and Bank of America Corp, was downgraded to 'neutral'. This will undoubtedly deliver a blow to the banking giants leading the way in the Q1 US stock earnings season that kicks off this Friday, potentially resulting in a significant reduction in overall performance expectations for Bank of America Corp. The performance of Wall Street giants leading the way in the US stock earnings season is crucial for the global stock market On Monday, Trump adamantly refused to relax tariffs, and the "financial market catastrophic crash" continued. Asian stock markets opened on Monday with a rare historic crash, following last week's drop of more than 10% in US stock index futures. This shows that the "global stock market disaster" that saw over $5 trillion in market value wiped out globally last week is far from over. Asian stock markets faced another "Black Monday" that will go down in financial history, with the Japanese stock market triggering a circuit breaker mechanism at one point. The MSCI Asia Pacific Index plunged by up to 8% during trading hours, marking the largest single-day decline since October 2008. The Hang Seng Tech Index, covering many tech giants such as Tencent, Alibaba Group Holding Limited Sponsored ADR, Meituan, and Semiconductor Manufacturing International Corporation, plummeted by up to 17%. The new US stock earnings season officially begins this Friday, with Wall Street financial giants such as J.P. Morgan (JPM.US), Wells Fargo & Company (WFC.US), Morgan Stanley (MS.US), and BlackRock, Inc. (BLK.US) taking the lead. The performance of these financial giants, covering investment banking, wealth management, and personal and institutional banking, as well as their outlook for future performance, will have a significant impact on the US stock market, and even the global stock market. Particularly in the current situation of Trump's aggressive tariff policies depressing global stock and other risk asset trends, the market expects Wall Street financial giants, especially banking leaders, to kick off the new US stock earnings season with better-than-expected performance, leading to a strong rebound in the US stock market and even the global stock market. Under the heavy pressure of Trump's tariffs, the recovery of the US capital market may face resistance The latest report released by Morgan Stanley, which downgraded the outlook for the US large bank sector, states: "Under Trump's tariff policy, which far exceeds market expectations, we expect US economic growth to slow down, coupled with rising economic uncertainty, significantly delaying the recovery of the US capital market that was just starting to show signs of improvement, gradually slowing down loan growth, and slightly increasing net write-offs for consumer and business loans above our previous estimates at the cycle average reflecting the current unemployment rate." Morgan Stanley analysts also anticipate that a new era of banking industry regulation will begin over the next several years, starting this year, but they have not adjusted their expectations for stock buyback programs. The Morgan Stanley analysis team has significantly pushed back their expectations for the US capital market recovery relative to GDP normalization from 2026 to 2028. Morgan Stanley predicts that due to the significant potential risks brought by rising US import costs and inflation, the credit quality of commercial and consumer loan portfolios is at risk.Costs will increase significantly, and the average net interest margin of large banks will shrink substantially.In this latest research report, Morgan Stanley has lowered its median forecast for the earnings per share of large US banks for 2025/2026 by 4% to 8%. "Given the recent market volatility, the outlook for investment banking and wealth management fee-related revenues clearly needs to be significantly lowered. Our median forecast for revenue growth in 2025 has been reduced from 4% to 3%. Therefore, we expect bank management to convey similar information, and loan growth guidance may also be slightly adjusted by then," Morgan Stanley stated in the research report. For the global leader in investment banking, Goldman Sachs Group, Inc., Morgan Stanley has downgraded its stock rating from "hold" to "neutral" mainly due to the bank's exposure to investment banking revenues, which could lead to significant downward revisions in capital market revenue expectations. Additionally, the increased risk of a US economic recession may cause the value of Goldman Sachs Group, Inc.'s Apple Card portfolio to shrink. As for the target price of Goldman Sachs Group, Inc., Morgan Stanley has significantly reduced its target price from $659 to $558 within the next 12 months. Goldman Sachs Group, Inc.'s stock price fell over 5% to around $447 in early trading on Monday. Regarding Northern Trust Corporation, Morgan Stanley's research report states that "the market correction implies a significant decrease in the likelihood of the institution achieving a 105-110% fee-to-trust fee ratio," leading to a downgrade in its rating from "neutral" to "underweight." "We predict a 2 percentage point downward adjustment in operating leverage for 2025, with total revenue growth of +2 percentage points (net interest income/non-interest income growth of +5/+1 percentage points, respectively). Overall expenses are expected to grow by +4 percentage points (as opposed to the guidance of +5 percentage points)," Morgan Stanley indicated in the report. Morgan Stanley has revised its target stock price for Northern Trust Corporation from $132 to $95 within the next 12 months. On the other hand, Bank of America Corp has been upgraded from a "neutral" to "buy" rating by Morgan Stanley due to valuation factors. "Bank of America Corp is the worst-performing money center bank in terms of stock performance year-to-date, as market concerns about the Fed rate cuts and the flattening of the yield curve may suppress the narrative of net interest margin expansion. We project that BofA's net interest margin will expand from 1.96% in 2024 to 2.08% in 2025 and 2.15% in 2026, benefiting from a $1.6 billion increase in net interest income from the termination of the BSBY from Q4 2024 to Q4 2026, as well as $15 billion of notional principal maturing in fixed-rate swaps at 2.5% in the second half of 2025," stated Morgan Stanley's analysts, adding that these positives will materialize regardless of whether the Fed announces a rate cut.