Transcription
I am sitting here at Morgan Stanley's headquarters in New York with Ted Pick, the one and only, the chair and the CEO of Morgan Stanley, after an earnings result that you led off with by just saying Morgan Stanley had a record quarter. Mic drop. What led that kind of strength?
We have a team that I'm so proud of, and we've been building our firm for all these years. And we have the strategy set now over the last couple years: raise, manage, and allocate capital for clients. We've a wealth and investment manager alongside investment bank, and the integrated firm are those divisions working together. So it it begins and ends with the team. It's one quarter. We're on to the next quarter, but, I'm really proud of Morgan Stanley Blue today.
There's a question about the trading and sales volumes and how they absolutely blew expectations out of the water, particularly at Morgan Stanley for both FIC and equities. How much does this stem for good volatility versus bad volatility? Because sometimes when things are kinda moving around, it hasn't led to those kinds of results, but this quarter seemed to have been a real boon for Wall Street.
I think you're right about that. The, the crisis in The Middle East began to bubble up, and folks were, thinking going into 2026, this would be a year of investment banking tailwinds, large cap corporate health, momentum, upside trade. And then this exogenous event was creeping up, but it wasn't sort of like a bang COVID that became pretty quickly uninvestable. Correlation of assets, and the only thing you can do is put your pencil down. This is one where folks thought, well, we'll see how the conflict evolves, but I'd like to express a view. Perhaps I wanna hedge some of my portfolio. Perhaps I wanna diversify. So you start seeing dispersion activity. And our job at Morgan Stanley is to bring content like you and then to get folks to act. And if they're in a mood to act, we're effectively moving inventory, market making our best ideas. And then there are buyers and sellers for hedging insurance and the like. And so in that sense, some volatility is a good thing because you can sort of measure. Where where it becomes bad is if it's risk off and people say, wow. I can't do anything to put their pencils down. So, yes, this was a good vol environment because we were close to clients, and those clients were listening to our content and evolving and trying to measure through scenarios, and, that worked both in equities and in fixed income.
What's fascinating is it also worked in the banking side. Usually, when you have that kind of volatility, it isn't good for capital markets on the primary side because people are concerned. They sit on their hands. They don't do some of the deals that were expected. That was not the case in the first quarter. How much do you see that pipeline, which you talked about on the earnings call, being resilient and solid coming to fruition given the fact that there has been an easing in some of the tensions in The Middle East?
Well, that's an interesting point you're making that typically when you effectively have market making to sort of protect, you're not gonna have the risk spirits of the new issue market or the m and a market functioning at the same time. And I think, the m and a market and the new issue market worked in part because there so much tailwind from the beginning of the year. And in certain sectors, the AI ecosystem, even with geopolitics, they were able to keep going. So the question that hopefully will become a hypothetical would have been if the conflict had gone for a number of quarters and we start to see energy costs get effectively imported from Asia through Europe to The US. What would that do to the calendar, both the m and a calendar, the IPO calendar? I I hope that question will be for another day or maybe no day. Today's question is if the conflict can be boxed at some level, would we expect the, coming to the market of these great companies, but also smaller, very high quality sponsor companies to either come via IPO or to engage in the m and a trade that has been sort of the logjam for the last couple of years. And I think we're seeing in pipelines that, both corporates and sponsors wanna come. So I think what you could have is a period now where you'll still have some volatility, maybe not the very high levels of charged activity at the beginning of the year that was, generally speaking, good for trading desk. Maybe you'll see, more of a normalization in those types of activities. Remember now, the volatility measures already elevated, so the price of buying incremental insurance is high. But then importantly, the core corporate finance life cycle that we've been looking at over the last couple years, hopefully, can resume against S and P 7015% earnings growth, and we can we can keep going. But the only caveat I'd make here, Lisa, there are gonna be some companies that are just not they're still not ready. They're they're in they're locked in sponsor portfolios, and they're gonna need even more time. Five years not enough. They need six, seven years because of the higher rate of interest and and that, to sort of carry the debt, but they're gonna be other companies clearly that wanna come. And we're beginning to see the lead sponsors and lead companies, not necessarily these mega caps. Those are coming in any case. But the next year of companies we see in bake offs, sort of like, m and a versus IPO type of bake off, we're we're seeing those we're seeing those happening, and I think that that augurs well.
What needs to happen for those deals to all come to market? Does it depend on rates coming in or volatility staying, relatively muted or where it is? I mean, what what are some of the, sponsors and some of the CEOs talking about here?
I think the biggest risk continues to be that inflation gets imported around the world again through the energy complex and then eventually it works its way through the food and general living ecosystem. And that becomes that becomes challenging. That that that clears the cost of capital and effectively then you start talking about the r word. The good news, we're not talking about the r word. And so that, you know, that that that translates into, I think, you know, sort of continued momentum and high quality companies and the wealth piece of the spectrum is continuing to deploy, continuing to want to engage. So I think if there is some, sort of and, again, I I don't wanna use the phrase, it's and complex issue, but sort of a better understanding, maybe a narrowing of the cone of certainty around what is happening in The Middle East. That I think is gonna be enough for folks to say, okay. You know what? I can sort of manage through the imputed energy cost in the 2026, and we're gonna continue with sort of the game plan. The game plan is to get bigger, to defuse the cost of AI. Remember that the regulatory backdrop, very favorable, and then the need to defuse the cost of AI, real. You put those two together. I'm not saying bigger is better for everyone, but bigger is better might be hip again.
Well and we heard about that from United speculating or some speculation that you might United might buy American Airlines. If that gets through, what's next? Morgan Stanley buying Goldman Sachs. I mean, how big could it get? Should there be some sort of regulatory green light potentially to even some of the big players?
Right. Well, on on on on mergers inside of our space, I I'll I'll make a you gave me an opening to make a comment on that. I think one of the interesting, phenomena of the last couple years and one of the things I've learned in this job is, that the quality of the management teams and the quality of the business models of our closest competitors is very high quality. This is so important for us to have vibrant competitors now in a period when, the economy is hopefully going to really have another leg and where we are able to conduct some of the businesses that we've been wishing to conduct and have been curtailed from conducting during this tough regulatory patch that we went through for the better part of twenty years. Now that we're able to compete in our traditional businesses, a lot of these firms have internal growth prospects, different models from each of the firms you know very well, where we'll be competing, but we don't actually need to go inorganic. I mean, there may be ways where you wanna bolt on, for example, an incremental business. But in our case, we have the wealth and investment manager. We have the investment bank on a global basis. And the organic growth potential for those businesses, the tailwinds are enormous. And I think with some of our competitors, not that I wanna make the pitch for our competitors, I think they have similar types of dynamics. And the reason that's so important is for investors, they wanna know that there's embedded durable growth inside of this group that still trades at a low teens multiple.
One, big question, frankly, most read story on the Bloomberg terminal today is about Fed chair independence, president Trump threatening to fire, Fed chair Jay Powell. How much does that register in any of what you talk about with people, or do a lot of people view this kind of as noise and the backdrop being really stable with respect to inflation expectations and even the institutional landscape?
Yeah. I think, I think sort of the politics of the moment tend not to get too much into the focus of how you wanna express a position because the question becomes sort of the the bigger landscape items. Do we have interest rate policy that feels like it's on a path? Well, I think the answer to that question is more so than it was eighteen months ago, but for the war. So with the resolution of the war, do we feel again like we're on a path where there's sort of a equilibrium between price stability and employment? And if it's friendly enough or predictable enough that the CFO that she can model what the next five years look like, well, then she's gonna be more comfortable taking to her board the idea of buying company x y z. And likewise, if there's a reasonable view of what the economy looks like because there isn't gonna be an inflation shock, the asset manager can then go go about, investing in a particular sector and trying to generate alpha.
On the call, you called private credit in its adolescence, and you talked about how your exposure is relatively small. Where is the fact and where are the where is the fiction when it comes to private credit and some of the concerns?
Well, I think, when I say adolescence, I mean, a learning it's a learning period. You know? It's it's grown like a weed. And that, as you know, is a function of an asset class that didn't exist, ten, fifteen years ago. Effectively, the street was replaced on that. It's around a trillion 7. High yields at about a trillion 7. Lever lending is at about trillion 5, trillion 7. So it's relevant, but the IG stack, as you know, is the investment grade stack is 10 to 15,000,000,000,000. It's all credit. It's all credit. So all things be equal, if the economy is growing, credit does fine. It does fine. When there's a recession, credit struggles. And then the question is then, which of the borrowers were really doing the work around what's in underlying portfolios? How quickly was the capital put to work. And I think what we're gonna see is we're gonna see dispersion of returns among great asset managers who really stuck to their knitting, thought about in the, sector diversification, thought about how long it takes to put those investments to work, and manage to do less well. And over time, I think the odds will find their place as a growing asset class for all kinds of institutional investors.