Trading slowdown to test investment bank revenue in 2026

It has been a great year to work in capital markets at leading US and European investment banks after an equities trading boom generated billions of dollars in revenue. The upswing has been especially good for Morgan Stanley as it surpassed arch-rival Goldman Sachs in equities trading revenues for the first time since 2022 in the third quarter of 2025.

While one can imagine Morgan Stanley bankers popping champagne bottles at the news, its performance is not an outlier. Most major global investment banks booked double-digit year-on-year growth in their equity trading revenues in the third quarter of 2025, according to earnings data compiled by S&P Global Market Intelligence, with Morgan Stanley logging the strongest rise of 35 per cent.

“Prime brokerage revenues drove results as average client balances and financing revenues reached new records,” Morgan Stanley chief financial officer Sharon Yeshaya said during the US group’s earnings call in October.

Further data compiled by financial data company Coalition Greenwich indicates the 12 top investment banks it follows are on course to book a total of $346bn in revenue this year, up from $315bn in 2024.

Other areas of investment banking such as mergers and acquisitions — especially deals worth $10bn and above — have made a strong comeback after the chaos of Donald Trump’s “liberation day” tariffs subsided.

There have been 66 deals worth $10bn or more announced so far this year according to LSEG data. Momentum picked up in the second half of 2025, in which 35 megadeals were announced compared to 31 in the first six months. In fact, the six largest deals all came from the end of July onwards.

These included the jaw-dropping $55bn leveraged buyout of Electronic Arts by a consortium made up of private equity giant Silver Lake, Saudi Arabia’s Public Investment Fund, and Affinity Partners. The deal, the largest of its kind in history, helped Goldman Sachs earn a $110mn advisory fee, the most lucrative the bank has ever received for an M&A transaction.

Valuation gaps and headwinds

Given all this, one would assume that bank valuations would be high, but this is not the case. According to EY’s global banking outlook, lenders continue to trade at a discount of around 60 per cent relative to the broader market.

EY gives three reasons for the valuation gap, despite the surge in equities trading and return of gargantuan M&A deals.

First, while returns have risen, they remain only slightly above the cost of equity, offering investors limited protection against future shocks.

Second, doubts persist about the durability of current returns, even though they have held up longer than expected.

And third, investors remain sceptical that banks can deliver meaningful, profitable and sustainable top-line growth without macro tailwinds.

“Closing this valuation gap will increasingly depend on management action — specifically, the ability to differentiate against peers while maintaining cost discipline and pursuing strategic, profitable growth,” says EY.

There are other factors that could constrain investment bank revenue next year as well. Coalition Greenwich forecasts that equities and fixed income commodities and currencies trading businesses are unlikely to experience the performance highs of 2025 in the coming year.

Its index of the top 12 US and European investment banks says that equities trading revenue is projected to have increased 15 per cent year on year to $92bn for 2025, with FICC revenue forecast to grow 8 per cent to $163bn over the same period.

However, Coalition Greenwich estimates that both are unlikely to have such a good year in 2026, with equities trading revenues set to fall back 6 per cent while FICC revenues are expected to edge lower by more than 1 per cent.

This is important because the two business lines can account for as much as 75 per cent of capital markets revenue at top investment banks, according to Stuart Plesser, a senior bank analyst at S&P Global.

“Even if IB revenue from origination and advisory activities went up while FICC and equities trading went down, this would mean the banks would have a weaker performance overall given how much revenue they account for,” he says.

A trading slowdown would be a bigger issue for European banks that tend to be more reliant on equities and FICC trading than their US counterparts, which have a more balanced mix between trading and origination/advisory activities.

Coalition Greenwich projects origination and advisory revenues will grow 9 per cent year on year to $99bn in 2026.

ECM and DCM prospects

In its own recent global banking outlook, Moody’s Investors Service predicts global investment banks will benefit from a diversification of their activities across capital markets and advisory business lines.

The company says that revenues among US-based global investment banks and universal banks increased by 14 per cent year on year in the first nine months of 2025.

It expects falling interest rates to be generally positive for these activities, providing support for debt issuance and M&A activity in 2026.

Johann Scholtz, senior equity analyst at Morningstar, also expects robust growth in equity capital market revenues driven by increased initial public offering activity — if market conditions remain benign across the world.

“Private equity sponsors need to step up portfolio realisations as limited partners will increasingly demand return of liquidity,” he says.

According to Scholtz, US ECM revenues in particular could receive a “major boost” from a number of blockbuster tech IPOs expected next year, including Reliance Jio Platforms, Anthropic, OpenAI, SpaceX, and Kraken.

“We also think Asia could see the strongest growth as Indian and Chinese entrepreneurs look to raise capital,” he continues.

Morningstar predicts lower interest rates will support increased issuance in the debt capital markets space, with the divergence in rates across different markets a key factor.

“US and UK issuance should be strong, boosted by declining rates, although it could be back ended to the second half as issuers wait for rates to stabilise,” Scholtz says.

The Federal Reserve cut its federal funds rate for the third consecutive month in December 2025 to a range of 3.5 to 3.75 per cent, with the Bank of England following suit the same month with its fourth cut of the year. By contrast, the Bank of Japan increased rates from 0.5 to 0.75 per cent, their highest level since 1999, while the European Central Bank kept rates on hold for the fourth meeting in a row.

“With Japan in a hiking cycle, issuance will taper down while European issuance should also lag that of the US and UK.”

According to Morningstar, increased spending on the energy transition, defence, and supply chain restructuring (driven by geopolitical fragmentation) will also require financing in Europe.

“The leading European investment banks like BNP Paribas, Deutsche Bank and Barclays are especially well placed to benefit from these trends,” Scholtz continues.

AI bubble?

One area that investment banks will have to manage is the risks and rewards of the artificial intelligence boom.

On the one hand, Morningstar’s Scholtz says that capital-hungry hyperscalers’ data centre investments will continue to fuel infrastructure-related debt issuance.

Conversely, Guillaume Lucien-Baugas, vice-president senior analyst at Moody’s, points out that the AI investments that have supported US GDP growth and equity markets in 2025 present a risk for banks should the bubble burst.

“A sustained correction in equity markets would also have a negative effect on banks’ asset quality, in view of elevated stock valuations in the US tech sector and its high weighting in some indices,” he says.

He adds that such a correction would affect consumer and business sentiment, hurting spending and hiring prospects.

“The financing of AI companies will also be under scrutiny and certain banks may focus on hyperscalers in this regard,” he continues.

While 2025 turned out well for investment banks, it is hard to judge with any certainty if the same will be true next year.