Several big banks reported earnings during the week of October 14, 2024, and signals were largely positive. Morgan Stanley (NYSE: MS), the 6th-largest financial institution in the U.S., was among the banks to reveal better-than-expected earnings results. In response, shares of the firm jumped to new all-time highs, and the company ended the week up 9% over a five-day span and 61.7% in the last year.

This may be exciting news for longtime holders of MS shares, but others are likely wondering whether the stock can continue this upward climb or if a reversal is imminent. The consensus among analysts across Wall Street is that shares of Morgan Stanley are likely to fall a bit, as the average price target based on 21 analyst ratings is $107.56, about 11.2% lower than current levels.

Digging deeper into Morgan Stanley's earnings report and other considerations going forward, the analysis gets more complicated.

Major Earnings Surprise, Standout Provision for Credit Losses

Morgan Stanley didn't just beat analyst expectations for revenue and earnings in the third quarter of the year, it trounced them. Revenue swelled by almost 16% year-over-year to $15.4 billion, more than a billion dollars over analyst projections. A net interest income of $2.2 billion marked a year-over-year improvement; Morgan Stanley stands out among rival banks as a rare example of a firm that boosted its net interest income during this period.

Profits grew by more than 31% relative to the prior-year period, reaching $3.2 billion for the quarter and also exceeding forecasts.

Reducing its provision for credit losses (PCL) to $79 million aided Morgan Stanley's profit performance in the quarter. This also sets the firm apart from other banks, many of which found it necessary to increase PCL into the hundreds of millions or beyond due to their special focus on consumer banking. Morgan Stanley remains less focused on the consumer side than rivals like Bank of America (NYSE: BAC) or Wells Fargo & Co. (NYSE: WFC).

Wealth Management and Investment Banking Thrive

As was the case for several other financial institutions reporting results around the same time, Morgan Stanley's high-profile wealth management and investment banking divisions were key performance drivers. Wealth management posted record revenues of $7.3 billion, with $64 billion worth of net new assets during the quarter. Investment banking revenues were up 56% year-over-year, fueled by fixed-income underwriting revenues more than doubled compared to last year.

Morgan Stanley CFO Sharon Yeshaya suggested in the company's earnings call that the firm is experiencing the "early stages of a multi-year capital-markets recovery" that has helped to reignite investment banking. As inflation has declined and debt underwriting has grown following the Fed's rate cuts earlier this fall, it makes sense that investment banking activity would pick up.

Reasons for Caution

Amid this flowering of optimism, there is still reason to be cautious about the coming quarters. First, while the interest rate cut has helped to lower some costs and stimulate certain financial activity, it may be most likely to benefit smaller regional banks that deal more heavily in commercial real estate. There is also no guarantee that a more favorable interest rate environment will continue, despite the Fed's suggestion that additional cuts are on the way.

Merger and acquisition (M&A) activity has picked up in the last quarter, with major banks like Morgan Stanley clambering to get in on the dealmaking process. However, the more assertive approach companies have taken to M&A is still well below the levels of several years back. And the results of the November election could have significant implications for M&A as well as many other aspects of the financial services world.

Where Is Morgan Stanley Headed From Here?

All of this is to say that, while Morgan Stanley stock is at a peak, it's not clear where things will go from here. Investors expecting the tide to continue to rise for financials companies on the strength of wealth management and investment banking activity are likely to anticipate further growth, while those cautious about upcoming political and economic uncertainty may take a more bearish view.