CORRECTED-BREAKINGVIEWS-Wall Street dynamic duo achieves the impossible

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Corrects Morgan Stanley fourth-quarter net income to $4.4 billion from $3.7 billion in second paragraph and context news.

By Stephen Gandel

NEW YORK, Jan 15 (Reuters Breakingviews) - Goldman Sachs GS.N and Morgan Stanley MS.N have valuation gaps that challenge even their formidable investment bankers. The Wall Street duo delivered sparkling quarterly results on Thursday and for the first time are trading at multiples of book value that exceed their pre-financial-crisis levels. What's impressive, albeit befuddling, is that they are far less profitable now.

A deal-making rebound helped propel both financial behemoths at the end of 2025. Goldman's bottom line increased 12% from a year earlier, to $4.6 billion, buoyed by stock trading and advisory fees despite suffering a 3% revenue dip related to the sale of its Apple AAPL.O credit card business to JPMorgan. Morgan Stanley's net income did even better, jumping 19%, to $4.4 billion.

There's probably more to come, looking through the investment prism. Goldman, led by David Solomon, now trades at 2.7 times its expected book value over the next 12 months, using LSEG data, while Morgan Stanley under Ted Pick commands 3.1 times. Regulatory rollbacks will ease capital requirements and boost returns, but neither bank is likely to achieve its former performance. Goldman generated nearly a 15% return on equity last year and Morgan Stanley more than 16%, compared to 27% and 23%, respectively, in 2007.

Stellar profitability isn't the only gauge; reliable earnings deserve appreciation, too. Both investment banks have prioritized steadier profit with less choppiness from buying and selling stocks, bonds and commodities. The idea that they are sufficiently steeled to warrant such a big valuation premium, however, is dubious.

The case is better for Morgan Stanley, which now generates nearly 55% of its revenue from managing other people's money. Goldman describes 45% of its top line as "durable," but about two-fifths of that designated proportion comes from its trading division.

Banks balked that shoring up the financial system by forcing them to hold more capital would restrain credit and punish shareholders. And yet lending continues apace, even with borrowing costs higher, while Morgan Stanley's stock price has more than doubled over the past five years and Goldman's tripled. Their valuations reflect this stellar alignment, but to presume it will persist would be a cosmic error.

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CONTEXT NEWS

Goldman Sachs said on January 15 that its fourth-quarter net profit increased 12% from a year earlier to $4.6 billion thanks to deal-related fees and strong trading despite suffering a 3% decline in revenue because of a one-time hit related to the sale of its Apple credit card program.

Rival Morgan Stanley reported a 19% jump in net income, to $4.4 billion, on a 10% rise in revenue on the back of strong M&A and debt underwriting business.

Goldman generated a 16% return on equity in the quarter while Morgan Stanley's was nearly 17%.

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini, Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))