Isolated signs of capital market recovery seen by CEOs of Goldman Sachs and Morgan Stanley - is spring coming to Wall Street?

On Monday, June 12th, the CEOs of Goldman Sachs and Morgan Stanley both said they saw "sprouts" in their struggling investment banking businesses, which have recently implemented large-scale layoffs due to the rise in interest rates suppressing activity.

Currently, Wall Street is experiencing one of the worst periods in years, with capital market activity and trading at a standstill due to potential buyers and sellers struggling to reach agreement on prices.

However, after investment banking revenue declined for several consecutive quarters, Morgan Stanley CEO James Gorman said:

My intuition tells me this may not be a good script, but over time, I think we've hit bottom. We clearly see more sprouts, and I'm having more discussions with CEOs.

Gorman plans to step down as CEO within the next 12 months, and he also said that after laying off thousands of employees in recent months, Morgan Stanley is "unlikely" to make further large-scale layoffs in the near future. When discussing the recent layoffs, he said:

We can never be 100% certain about the future, but we're unlikely to go back to where we were before. Morgan Stanley's current number of employees is what we want.

Goldman Sachs CEO David Solomon said:

I expect capital market activity to rebound as we enter 2024.

Solomon said that Goldman Sachs has also seen "sprouts" of a recovery in capital market activity:

We reset valuations and capital costs in 2022, which clearly slowed down capital market activity. I always say that resetting the capital markets takes four to six quarters. We're now at about five quarters. I expect capital market activity to rebound as we enter 2024. Ultimately, people need funds, and they can postpone some financing activities, but ultimately, they can't postpone them indefinitely.

Gorman added that the Fed has raised benchmark interest rates to between 5% and 5.25%, and it is unlikely to cut interest rates this year, but rates may start to fall "at some point" in 2024 and then stabilize at 2% to 3%.

Solomon warned that even if the US can avoid a recession, it may still face a challenging environment of low growth and sustained inflation.

In early May, according to sources familiar with the matter, Morgan Stanley executives were discussing plans to cut about 3,000 jobs from their global workforce by the end of this quarter. This is equivalent to about 5% of the company's wealth management department (excluding financial advisors and back-office departments) employees. One source said that the layoffs would have a greater impact on the company's investment banking and trading departments. This is Morgan Stanley's second major layoff in six months. In December last year, the company decided to lay off 2%, or about 1,600 employees.

At the beginning of the year, Goldman Sachs also began large-scale layoffs, affecting more than 3,000 employees.